What Is Commodity Trading?
A commodity is nothing but raw materials or agricultural products or assets, that has some everyday life importance. Buying and selling of commodities in the certain exchange are called as commodity trading. Few examples of commodities are Crude oil, Gold, Silver, Palm oil, Natural gas, and more.
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Commodity Future Contracts
Like equity future contacts, commodity future contract is a way to invest in the commodity market in India. Commodity future contract is an agreement to buy or sell a certain commodity at a future date. Most of the commodity contracts are available as futures contracts in India.
Commodity Option Contracts
Commodity option contracts are mostly used for hedging and speculation purposes. A commodity option contract gives you the right, but not the obligation to buy or sell a certain commodity at a future date. The commodity option can be risky without hedging.
Commodity Exchanges In India
In order to trade in the commodity market you need a commodity exchange. There are many commodity exchanges in India out there, but among those the Multicommodity Exchange (MCX) and National Commodity and Derivatives Exchange Limited (NCDEX) is most famous and widely used.
Multi Commodity Exchange (MCX)
Established in 2003, Multi Commodity Exchange of India Ltd (MCX) is a private commodity exchange in India. The exchange is based in Mumbai, Maharashtra, India.
MCX is India’s largest commodity derivatives exchange in India. MCX also offers options trading in certain commodities like gold, crude oil, copper, and futures trading in base metals, bullion, energy, and some agricultural commodities.
Base Metal Commodity Trading In MCX
Base metals like Aluminium, Copper, Lead, Nickel, Zinc are being traded in MCX. All of them are traded as futures contracts with different expiry and lot size. Only Copper metal has option contracts.
Bullion Trading In MCX
Precious metals like Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Global, Silver, Silver Mini, Silver Micro, Silver 1000 are traded in MCX as future contracts with different expiry. Out of these bullion Gold and Silver have option contracts.
Energy Commodity Trading In MCX
Energy commodities like Crude Oil, Natural Gas are being traded in MCX as future contracts and additionally crude oil as an option contract also.
Agri-Commodity Trading In MCX
Agricultural products like Cardamom, Cotton, Crude Palm Oil, Kapas, Mentha Oil are being traded as future contracts.
National Commodity and Derivatives Exchange Limited (NCDEX)
Incorporated in 2003, National Commodity & Derivatives Exchange Limited (NCDEX) is an agriculture-based commodity exchange in India. With an independent board of directors and NCDEX allows market participants to trade in commodity derivative contracts.
Here are few derivative contracts traded in NCDEX
- Cereals and pulses: Barley, chana, maize Kharif, maize rabi, wheat, moong, paddy
- Fibers: Kapas and 29 mm cotton
- Spices: Pepper, turmeric, jeers, and coriander
- Guar complex: Guar seed and guar gum
- Oil and oilseeds: castor seed, cotton seed oil cake, soybean, refined soy oil, mustard seed, and crude palm oil
Risk Involved In Commodity Trading
When you start trading with commodities there are many risks you need to know of! As commodities are physical goods unlike equity and currency trading. So, here is some risk involved in commodity trading.
Operational issues like shipment delay, crop failure, quality problems, paperwork issue, etc can cause delivery issue and in the meantime you may suffer loss.
The commodity market can be wildly volatile with an increase and decrease of demands and other news flow.
Anyone can trade in the commodity market with a very low amount, so the margin required for a trade is very low. Because of that traders may suffer huge losses if, they have lots of positions.
Commodity price depends upon various factors like interest rates, currency exchange rates, government policy, and others. So in order to trade in the commodity you have to track news and government’s policy.
Generally commodities are highly liquid counters, but there are several commodities where liquidity may be very low and traders will not able to buy or sell.
How To Trade In Commodity Market In India?
In order to trade in the commodity market you need a commodity trading account. You can open a commodity trading account in India with brokers like Zerodha, Upstox, or 5Pasia. To open a commodity trading account in India you need certain documents.
Documents Required For Commodity Trading
- Aadhar Card
- PAN Card
- Bank Statement (6 Months)
- Cancel Cheque
- E-Sign (Via- Aadhar, Mobile number should be registered with Aadhar)
Commodity trading in India is one of the great platforms of investment and earning some money. But, every investment tool has some merits and demerits.
So in order to protect your capital you need to learn about the product first and stay updated with the related news and do not ignore the risk involved in commodity trading.