The commodity market considers as one of the significant foundations of the global trade platform. As we know the term “trading” refers purchasing and selling of any products. In India, it is one of the most evolving forms of trading. Commodities, whether they are related to energy, food or metals, are a significant part of everyday life. Hence, the commodity has been traded for a long time. In India, commodity trading has started much before it started in many other countries. Now, it’s become a popular trend. Today, we are going to cover the commodity trading. Here, from this content, you will get Beginner’s Guide to Commodity Trading in India.
Commodity Trading in India
In 2002, Government re-introduced the commodity market and now it has grown exponentially. With the passing days, the commodity trading has gained lots of popularity due to its ease of trading methods and profitability. In this content, you will get a basic guidance regarding commodity trading in India. Here, you will get every basic detail regarding commodity trading in India.
Let’s start from the very beginning, what the commodity market is. Though there are numerous ways to invest in commodities, the best way is through a futures contract, it is almost similar to futures stock trading. Therefore, just instead of purchasing or selling stocks, investors purchase and sell commodities. In commodity trading, retail traders and investors buy or sell products through commodity exchange. If we broadly split the commodity market, multiple segments come out, some of these are as follows:
- Metals (Gold, Silver, Copper, Platinum, Aluminium, Lead, Nickel, Zinc, etc)
- Energy: (Crude Oil, Natural Gas etc)
- Agriculture Products (Beans, Rice, Wheat, Corn etc)
- Livestock and Meat (Cattle, Eggs etc)
At present, apart from numerous regional exchanges, there are main six national commodity exchanges in India. They control the entire Indian commodity market with certain rules and regulations.
- Multi Commodity Exchange (MCX)
- National Commodity and Derivatives Exchange (NCDEX)
- National Multi Commodity Exchange (NMCE)
- Indian Commodity Exchange (ICEX)
- Universal Commodity Exchange (UCX)
- ACE Derivatives exchange (ACE)
Among these above exchanges, Multi Commodity Exchange (MCX) is the popular one. The chief regulatory body of the commodity market was Forward Market Commissions (1953) but later it was merged with SEBI (Securities and Exchange Board of India).
MCX stands for Multi Commodity Exchange. It is the biggest exchange in the Indian commodity market, established in the year 2003. Just like NSE/BSE provide platforms for trading in stocks, MCX provides a platform for trading in commodities. MCX allows trade in almost every segment of the commodity market, metal, energy, agriculture etc.
Investment Strategy in a Future Commodity Market
As I have mentioned earlier that there are various ways of investment in commodities such as ETF (Exchange Traded Fund), Mutual Fund, Hedge Funds. Here, one thing must be mentioned that the most popular way to invest in commodities is through future contract.
Each futures contract represents a specific quantity of a given commodity. The commodity futures contract is like an agreement to buy or sell a specific quantity of a commodity at a set price at a future date. Each Future contract has an expiration date.
How to Open Commodity Account?
Primary steps to deal with commodity trading is to open an account under a SEBI registered broker. After account opening traders can start trading by deposit fund in their Demat account. Nowadays, there are many brokers available in the market for commodity trading but in my view, Zerodha (one of the leading lowest brokerage firms in India) performs best. In Zerodha Kite, you will get one of the best trading platforms with multiple facilities. It also offers eye-catching margin benefits. To Open an account in Zerodha for Commodity Trading, you may click on the link below:
OPEN AN ACCOUNT IN ZERODHA FOR COMMODITY TRADING
Choose a Commodity Broker Carefully
So, like share trading, in the commodity market also, broker plays a vital role. From brokerage charge to your Demat account, everything has a crucial role. Whenever you choose a broker, you have to keep certain things in your mind such as brokerage charge, services, facilities, trading platform, offers etc. First, fix your priority list and then choose wisely.
Advantages and Disadvantages of Commodity Trading
Here, is the list of advantages and disadvantages of commodity trading. Traders should analyze the advantages and disadvantages clearly before making any choice in the commodity trading.
- Commodity trading helps to hedge against inflation.
- The commodity market is liquid enough to book profit.
- Affordable deposit accounts with a trading opportunity
- The commodity is one of the most highly leveraged investments.
- During inflation, commodity trading considers as one of the safest options in comparison to share-market.
- You can arbitrage the particular trading when you buy a commodity at a low price in one market and instantly sell the product for a higher price in another market.
- Traders who are dealing with the future market must be acquainted with the volatility of the future market.
- Only experienced and knowledgeable investors can beat the market properly.
- Unpredictable trade movement can cause trouble.
Other Ways of Commodity Trading in India
Commodity Trading without directly investing in Futures is possible with ETF or Exchange Traded Funds and ETN or Exchange Traded Notes. Besides this, in the commodity trading, it is quite impossible for direct investment of mutual funds. Rather, there is an investment in the companies which are involved in commodity-related industries such as energy, food processing, mining, and metals etc.
However, the particular market is driven by inventory, demand, and supply. Just like any market, the demand-supply equation influences the market prices. Variables like social changes, weather, government policies, and global factors influence the commodity market balance. The Indian Commodity Market clocks a daily average turnover of near about Rs 12,000-15,000 crore (Rs 120-150 billion). The accumulative commodities derivatives trade value is estimated to have reached the equivalent of 66 percent of the GDP or Gross Domestic Products and the future will only see the rising percentage, says ICICI direct.com vice-president Kedar Deshpande.