What Are Commodities?
Introduction
Commodities are one of the oldest forms of trade in human history, yet many retail traders still misunderstand them. While stocks, mutual funds, and cryptocurrencies receive most of the attention today, commodities remain the foundation of all financial markets.
What Are Commodities?
Let’s start with something familiar.
Finished Goods vs Raw Materials
- Petrol is a finished product
- A T-shirt or shirt is also a finished product
But these products are not made directly.
- A T-shirt is made from cotton
- Petrol is made from crude oil
Cotton and crude oil are raw materials, and these raw materials are called commodities.
Definition: What Are Commodities?
Commodities are basic raw materials that:
- Come from below the earth (crude oil, gold, copper)
- Grow on the earth (cotton, wheat, rice)
Without commodities, no finished goods can be produced. Every major industry—textiles, energy, construction, food, and transportation—depends on commodities.
Why Are Commodities So Important?
Before modern finance existed:
- There were no companies
- No shares
- No stock markets
Yet people still needed essential goods to survive.
The First Trades in Human History
- Rice trading in ancient China and Japan
- Gold, copper, and grains in early civilizations
- Agricultural barter systems across the world
This is why commodities were the first traded assets in human history.
Commodities: The First Financial Market Product
The first product ever traded in financial markets was commodities.
“Commodities are the Mother of All Asset Classes”
Every other asset class—currencies, bonds, and equities—came later.
The First Commodity Exchange
The world’s first organized commodity exchange was the Chicago Board of Trade (CBOT).
Its purpose was to:
- Help farmers lock prices in advance
- Reduce price risk
- Create fair and transparent trading
Forms of commodity trading existed 4,000–5,000 years ago, even before modern money systems.
How Other Asset Classes Came Later
The evolution of financial markets followed this order:
- Commodities
- Currencies
- Bonds
- Shares (Equity)
This clearly shows that all modern finance is built on commodities.
Understanding Commodities and Liquidity in the Indian Market
Commodities are broadly divided into two categories.
1. Soft Commodities (Above the Ground)
Soft commodities mainly include agricultural products:
- Maize
- Barley
- Wheat
- Spices
- Chickpeas (Chana)
- Cumin (Jeera)
Indian Exchange: NCDEX is the leading exchange for agricultural commodities in India.
2. Hard Commodities (Below the Ground)
Metals
- Copper
- Nickel
- Lead
- Zinc
- Aluminium
Energy
- Crude Oil
- Natural Gas
Indian Exchanges: MCX (dominant) and NSE (growing rapidly).
The Big Myth: “Commodities Don’t Have Liquidity”
This belief comes from the pre-2015 era.
Before 2015
- Commodity regulator: FMC
- Equity regulator: SEBI
- FCRA governed commodities
- SCRA governed securities
Because of restrictions:
- Options trading was not allowed
- Mutual funds could not participate
- FIIs were not allowed
- Commodity indices were banned
Liquidity was limited.
What Changed After 2015?
In September 2015, commodities came under SEBI regulation.
- Futures & options were allowed
- Institutional participation increased
- Corporates could hedge efficiently
- New lot sizes introduced
- NSE entered commodity derivatives
The commodity market started growing rapidly.
Liquidity in Today’s Commodity Market (2025 Reality)
Example: Gold
- Contract size: 1 kg
- Contract value: ~ ₹1 crore
- Margin required: ₹8–10 lakh
Retail traders usually avoid such large contracts.
Solution for Retail Traders
- Gold Mini
- Gold Micro / Gold Petal
These contracts have excellent liquidity.
Why Gold Is the Best Commodity to Start With
- Deep cultural importance in India
- High liquidity
- Lower volatility than equities
- Strong correlation with silver
Crude oil is important but requires understanding global geopolitics.
Variable Lot Sizes: A Big Advantage
Gold Contract Sizes
- Gold – 1 kg
- Gold Mini – 100 g
- Gold Guinea – 8 g
- Gold 10 – 10 g
- Gold Petal – 1 g
Gold Petal (Best for Beginners)
- Contract size: 1 gram
- Contract value: ~ ₹10,000
- Margin required: ~ ₹1,000
Is the Commodity Market Too Volatile? (Myth)
- Gold rarely falls 10% in a single day
- Equities have seen multiple 10% crashes
- Gold is defensive and stable
Total Major Commodities for Retail Traders
- Gold, Silver
- Copper, Nickel, Lead, Zinc, Aluminium
- Crude Oil, Natural Gas
Tracking just three segments gives a complete market view.
Final Takeaway
- Commodities are the foundation of financial markets
- Liquidity issues belong to the pre-2015 era
- Gold is stable, familiar, and highly liquid
- Indian commodity markets are retail-friendly and well-regulated