Commodity Market In India – The Different Types Of Players

Posted by Nirav Singhaniya on November 20th, 2019

A country’s trading market is judged not only by the trading products available or the quality of regulation but also by the kind of players trading in a market. This statement also holds true for the commodity market. One can find thousands of traders, trading in various commodities such as gold and other precious metals, agricultural commodities, industrial commodities and so on. All these traders or participants are broadly classified into four categories. Classifying these players into different categories is important since each one of them leaves their own unique imprint on the market, thereby contributing to the market’s strength in their own way.

The four different types of players include:

• Speculators
• Margin Traders
• Arbitrageurs
• Hedgers

What drives these players? What’s unique about them? Why are they a part of the market?

Who are speculators?

As the name suggests, a speculator is a trader who makes money by speculating on the prices of the commodities. Since most of their trade is conducted on the basis of speculation, these players watch the market direction like hawks. They are typically direction-agnostic and prefer both long and short side trading.  Speculators also generally prefer to stay invested in the commodity market for a very short period of time. They usually exit the market as soon as their targets are met. While some people tend to think speculators are averse to risk, others believe that they are risk-takers.

Who are margin traders?

A margin trader is a commodity market investor who generally purchases more commodities than he has the funds in his accounts. For example, they may have Rs 30,000 in their account but may enter into a trade worth Rs 100,000 (the Rs 30,000 is the margin for the trade) . That’s why margin commodity traders are typically intra-day traders -- they tend to buy and sell commodities within a single trading session. All their trades are squared off before markets close and the profit or loss is settled from the margin amount in the account. Margin traders are typically investors who have high-risk appetites; because they are making leveraged trades.

Who is an Arbitrageur?

Regarded as the most unique and intriguing player in a lot of commodity market participants, arbitrageurs attempt to make profits from the difference in prices of the same commodity in different markets which are spot, forward, futures and options markets. They function in a highly dynamic environment, making rapid decisions. While trading in the market, arbitrageurs often try to organise any inefficiencies or imperfections and play an integral role in increasing the liquidity of the market. Arbitrageurs look to make the most of any pricing inefficiencies as soon as they spot it because such opportunities are short-lived.

Who is a hedger?

Hedgers are those commodity market players whose main intention is to hedge or mitigate risks. Since they are generally exposed to spot market commodity price volatility, they rely on the futures market to balance or hedge their risks. The sole purpose of hedgers is to reduce the exposure of their position to price volatilities.

Besides these, players the commodity markets also serve the interests of farmers, traders, companies in the food business etc. All of them use the commodity markets to hedge their risks. For example, a farmer may want to guarantee a certain price for his harvest, and can use the commodity futures market to do so. Or a biscuit company may want to use the market to lock-in on a price for wheat.