India’s financial markets have altered substantially during the previous few decades. Interested investors and traders now have several market segments to choose from. Understanding what commodity trading is all about is an excellent place to start if you want to get started with commodity trading in India. Once you understand the principle, commodity online trading is simple enough, even for a newbie.
What is a Commodity?
A commodity is a group of goods or raw materials that are essential in daily living, such as food, energy, metals, and other commodities that are exchangeable and can be physically transferred from one place to another.
In addition to traditional securities, commodities can assist investors in diversifying their portfolios. Some investors use commodities as a hedge against market volatility since commodity prices tend to fluctuate in the opposite direction of stock prices. Commodity investment is a technique designed to reduce financial risk for investors.
Earlier, commodity trading was limited to professional traders because it took a substantial amount of time, money, and experience. But now, there are several ways to participate in the commodity market.
What Is Commodity Trading?
Farmers still trade commodities among themselves in villages today. In the world of organized commodities trade, things are a little different. Commodity trading is once again gaining traction among investors. This trading takes place on a commodities market, which buys and sells a wide range of commodities and derivatives. The most frequently traded items are agricultural-related products and contracts based on them. However, non-agriculture commodities such as diamonds, copper, zinc, gold, steel, and energy like gas, and crude oil are increasingly traded.
In India, how many commodity exchanges are there?
Here are the 5 national commodity exchanges in India:
- MCX (Multi Commodity Exchange of India Ltd)
- NCDEX (National Commodity and Derivative Exchange)
- ICEX (Indian Commodity Exchange)
- NMCE (National Multi Commodity Exchange)
- ACE (Ace Derivatives Exchange)
- UCX (The Universal Commodity Exchange)
Also Read: How to trade with a Demat account? Step by Step Guide
3 Ways Investors Can Trade in Commodity:-
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Spot Trades
On a commodity exchange, the spot market is where buyers and sellers meet to negotiate for immediate delivery of the product. In India, the spot market allows for cash delivery, counter-purchase, or payment against documentation. On delivery of the product, payment can be made in cash or by transferring the title from one party to another. There is no aspect of future price determination or speculation in spot trades.
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Options Contracts
The buyer of an options contract has the right, but not the obligation, to purchase or sell an underlying asset or instrument at a predetermined price within a given time frame or on a predetermined date; and this makes the differences between an options contract and future contract. Otherwise, options are similar to futures contracts, in which the buyer has the right but not the duty to sell or buy an underlying asset at a predetermined price within a certain period or on a set date.
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Futures Contracts
Futures contracts are used by many dealers in India’s commodity market. Businesses use futures to protect themselves against price fluctuations in the commodities they manage, reducing the risk of financial loss. In India, speculators also participate in the commodity market.
Future contracts allow buyers and sellers to buy and sell at a later date when prices may be higher or lower than they are now. Futures contracts allow traders to trade with delivery and payment scheduled for a future date at a price agreed upon today.
How Does Commodity Trading Differ from Equity Trading?
People often confuse and seek differences between commodity trading and equity trading. They were puzzled about where to invest and which could be best for them. So let’s brainstorm by seeing the below differences between commodity trading and equity trading.
Commodity trading vs Equity Trading
| S.No. | Parameters | Commodity Trading | Equity Trading |
| 1 | Characteristics | Commodities are not differentiated goods used in the production of finished goods and for consumption. | Equities are financial instruments that reflect shares of a company’s ownership. |
| 2 | Ownership | You are not purchasing a share of the company’s ownership. In fact, you are not even purchasing the commodity | You are purchasing a share of the company’s ownership |
| 3 | Trading Hours | Commodities trading takes place for extended hours, such as the MCX, which is open from 9:30 a.m. to 6:30 p.m | Equities are only available for a limited time, such as the NSE, which is open from 9:15 a.m. to 3:30 p.m |
| 4 | Goal | The goal is to protect against price fluctuations or to profit from market price movements | The goal is to accumulate wealth over time through long-term capital growth and dividend income |
| 5 | Duration | Commodities are bought and sold for a shorter period of time | Stocks can be held indefinitely until the company is listed on a stock exchange |
| 6 | Margin | Commodities are traded on margin, which allows for a lot of leverage | Equities are traditionally not traded on margin. SMC, allows you to trade stocks on margin |
| 7 | Volatility | Commodities are extremely volatile because of the difficulty in predicting or forecasting their pricing | Equities are relatively less volatile. |
WHY TRADE IN COMMODITY FUTURES?
The openness of the price mechanism, low margins, risk management, and benefits to farmers in terms of price clarity have all drawn investors to commodities for futures trading. Below are the 8 reasons to trade in commodity futures:-
- Futures are highly leveraged investments.
- The futures market is extremely liquid.
- There are low commissions and execution costs.
- Speculators can make money quicker.
- Futures are excellent for hedging or diversification.
- Futures are more efficient and transparent.
- Futures contracts are only paper investments.
- Short selling is easier.
HOW TO OPEN A COMMODITY TRADING ACCOUNT?
To trade commodities, you’ll need a trading account, and a savings account linked to it. The following are the four steps to opening a commodity trading account:-
- Complete the account registration form.
- Submit all necessary paperwork.
- Finish the in-person verification process.
- Once your application has been processed properly, you will be given account information.
HOW TO TRADE IN COMMODITY FUTURES?
From the above section, we learned how to open a commodity trading account. Now, let us understand how trading in commodity futures occurs:-
- The trader pays the broker the margin amount.
- He makes the purchase.
- Buyers and sellers are electronically matched onto the exchange platform.
- When the market closes, the exchange establishes a ‘settlement price’ for each commodity. Depending on how the price has moved, the difference is credited to or debited from the trader’s account.
- The trader pays the difference in the margin (if any)
- Before the contract expires, the trader closes his position. He can also choose the delivery option, which causes a different paperwork procedure.
IMPORTANT TAKEAWAYS:-
- Metals, energy, livestock and meat, and agricultural commodities are the four basic categories into which commodities are traditionally classified.
- Commodities, besides traditional securities, can help investors diversify their portfolios.
- Commodities can be purchased in a variety of methods, including futures contracts, options, and exchange-traded funds (ETFs).
- Commodities could be dangerous investment propositions as the market (supply and demand) is influenced by odd weather patterns, diseases, and natural and man-made calamities which are unpredictable.
