Commodity trading is a great way to grow your wealth, fight growing inflation or just turn a hobby into something highly profitable.
But terms like MCX, futures contracts or trading hours in India might sound confusing.
Get rid of this worry; this guide will help you understand everything related to commodity trading.
What is Commodity Trading?
In commodity trading, a person buys and sells crude products, commonly agricultural items. The commodities could be anything, like gold or oil.
Wheat or coffee. But you do not actually buy the physical items; you buy the trading contracts that represent those items.
Let’s assume that you think the price of gold will increase in the future. In commodity trading, instead of buying actual gold bars, you will be rather buying a “gold futures contract”.
This contract is an agreement that you will buy gold at a certain price on a future date. If the price of the gold does go up, you can sell the contract and gain profit, and you will not have to handle the actual gold. If the price of gold goes down, you could lose money.
Key Takeaways
- Commodity trading means buying and selling contracts that represent raw materials. Like gold, oil or agricultural products, here the physical goods are not purchased.
- MCX and NCDEX are the most important commodity exchanges found in India.
- There are many benefits of commodity trading, like wealth growth, protection against inflation and the ability to trade without actually buying the physical goods.
- To start commodity trading in India, you will need to choose a registered broker and open a trading account.
- The commodity futures contracts are settled by squaring off the position before the expiry or sometimes by taking or giving the physical delivery commodity.
What are the commodity trading exchanges?
A commodity trading exchange is equivalent to a supermarket where the raw materials, agricultural products and other goods are bought and sold. This is a highly regulated platform and is used for trading in contracts that are standardised. This market allows traders to buy or sell and also understand the commodity prices.
Which commodity exchanges operate in India?
India’s two main commodity exchanges are the Multi Commodity Exchange, known as the MCX, and the National Commodity and Derivatives Exchange, called the NCDEX.
You are able to trade on FTX either today, using spot trading, or in the future through futures trading.
Advantages of commodity trading
Growing Wealth Prospects: Unexpected increases and decreases in prices on the commodities market may result from changes in supply and demand, geopolitical matters and changes in the weather. Such changes in market prices give traders the chance to make large profits. It is important to admit that investing abroad also carries a lot of risk.
Protection against inflation: Gold and silver are commodities that make your investments safer or stronger as inflation grows. When inflation devalues regular currencies, commodity prices spread out, and this makes it possible for investors to see their property or investments increase in worth.
Opportunity to turn a hobby into profit: Commodity trading can allow anyone with a passion for agricultural products, energy resources or metals to make money from their interest. Understanding a commodity market in detail gives an advantage to those who wish to find trading opportunities.
Ability to Trade Without Handling Physical Goods: Commodity trading happens, in most cases, through using contracts rather than dealing with physical goods. They guarantee that a certain amount of a commodity will be bought or sold at a fixed agreement price and date. As a result, traders take part in commodity trading without having to worry about the handling, moving and sending of the actual goods.
Access to Standardised Trading Contracts on Regulated Exchanges: All futures contracts for commodities follow the same standards for quality, amount and delivery, whether traded on regulated exchanges. These derivatives are exchanged through respected venues that apply orderly procedures and clear all transactions. Having rules and using standardisation support the better performance of markets and minimises risks from working with different partners.
Participation in Spot and Futures Markets: Trading in commodities lets investors take part in either immediate delivery markets called spot markets or markets where goods are sold months ahead with futures trading. It allows traders to match their investment goals and the amount of risk they can handle by selecting the trading instruments that fit them best, determined by if they wish to join present or future price activities.
How to Start Commodity Trading in India: 7 Simple Steps
Step 1: Choose a Broker
With a little effort, you can compare commodity brokers that operate in India. Review the commissions, the platforms they provide, the margin necessary to buy, the level of customer support and what commodities can be bought or sold. Look up with (SEBI) to be sure the broker is legal and registered.
Step 2: Open a Trading Account
Opening an account comes after you’ve selected the most suitable broker. All you need to do is fill out a form and include some address proofs (KYC) with your application documents.
Step 3: Understand Contracts
Get an understanding of the different types of commodity contracts available for trading, primary futures and sometimes spot contracts. Go through the specifications of the contract, such as lot size, tick size, delivery terms and the expiry dates for the commodities that you are interested in trading.
Step 4: Deposit Funds
The next step is depositing the funds into your trading account through the broker’s accepted payment methods. (Nowadays, UPI-based payment methods are widely accepted, and it is highly convenient too.) Different brokers have different policies regarding the initial margin.
Step 5: Analyse the Market
Trading is not gambling. Just like any other trader, it is very important to analyse the commodity.
Market and the price movements. This involves fundamental analysis, the fundamental.
Factors consist of different factors like global events, weather patterns and technical analysis (the chart patterns, and the indicators )
Step 6: Place Trades
With the trading platforms, you can buy or sell orders. Try to have an understanding of the different types of orders. These orders include the market order, limit order, and stop-loss order. Now choose the best based on your trading strategy and risk tolerance.
Step 7: Manage Risk
No good trader does any form of trade without a good risk management plan.
Basic techniques and skills like setting stop-loss orders to limit potential losses are a good trading habit.
Try to understand leverage and margin requirements and keep a distance from over-leveraging your positions. Diversification is also a great risk management strategy.
Additional steps
Monitor Trades: After the trade is placed, you are all set to monitor the performance. The market will be expecting you to be prepared to adjust your positions or exit trades based on your trading plan and the overall market movements.
Settle Trades: The commodity futures contracts can be settled in two ways.
- Squaring Off:
You can either open your position before the contract expiry date; this can be done.
(Initially, an offside, which means you buy if initially sold, or you sell if you initially bought)
2. Taking/Giving Delivery:
Or, sometimes physical delivery is an option upon expiry for some commodities.
This is quite common for traders who have actual physical commodity needs, not the typical traders. Try understanding the delivery process if you intend to take or give delivery.
FAQs (Frequently Asked Questions)
Angelone is a popular choice for commodity trading in India. The app is highly user-friendly and also has comparatively lower brokerage fees. However, it is always up to your requirements and user experience.
Though it is dependent on the broker and the margin requirements, the minimum amount could be as little as around 5000 to 10000 rupees.
Disadvantage/Risk | Description |
|---|---|
Volatility and Price Fluctuations | Some market factors, such as weather, international situations, supplies and demand and the health of the economy, are not always predictable. Because commodity prices may rise or fall sharply, the sector is often very volatile. |
Leverage Risks | While trading in commodities, the traders often use high leverage; this might provide high profits. But it is also risky in terms of loss. If overused, this can lead to major financial losses quickly. |
Market Complexity | For understanding the commodity market, you will need in-depth knowledge of specific factors. These factors impact the supply and demand; thus, this makes this form of trading more complex and time-consuming. |
Geopolitical Factors | There is an element of unpredictability in commodity trading; this is due to the dependency on global political events, international trade agreements and government policies. |
Storage and Delivery Concerns (For Physical Settlement) | Sometimes there is involvement in the physical delivery of the commodities; thus, there could be issues related to the storage, transport and logistics of the physical commodities. |
Risk Management Challenges | Understanding risk management through stops and being diverse is challenging for newcomers, so managing commodity trading risks needs some experience. |
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Happy trading!
