In the first and the second parts, we have seen what the financial market is, and what are money market, capital market, forex, and interbank markets! This article focuses on the Commodity market along with Over the Counter markets.
What is Commodity market?
A commodity market is a place where investors can buy or sell different types of commodities through index funds, mutual funds, and exchange-traded funds (ETFs). In India, there is Indian Commodity Market (MCX) to trade commodities; while in the U.S, there are Chicago Mercantile Exchange (CME), New York Board of Trade (NYBOT), and New York Mercantile Exchange (NYMEX). There are more than fifty commodity markets across the
globe at present. Commodities can be traded as Over the Counter or on exchanges as well.
Types of commodity market:
Commodities are classified into two types.
Commodity futures contracts are widely used in order to secure the price of a commodity to be purchased or sold in the future. For example, an investor can easily buy a future contract of Sugar at Rs. 1000 at present, if he envisages that there are chances of hike in the price of sugar in the future and it can reach to Rs. 1100.
What is Over the Counter market (OTC)?
When a company is small or does not meet with the listing eligibility, such stocks are traded off the exchanges though Over the Countertrade. These kinds of stocks are traded by dealers through phones or computers. Many times these stocks are also low in credit ratings, like penny stocks; and dealers or brokers are the Market Makers for them. These stocks are traded on Over the Counter Bulletin Board (OTCBB) or through Pink Sheets.
Apart from these, there are various companies that have good credit value but do not want to be traded on exchanges to avoid strict rules and regulation; in such situations, those companies chose to be traded on OTC, i.e. Allianz. Even many instruments traded by financial institutions and investment banks are not for retail investors and thus they chose OTC.