Commodity trading in India is not a new concept. But with the enhancement of technologies, MCX and NCDEX exchanges are now providing online commodity trading facilities. Due to online trading, commodities are getting a big volume compared to equity trading. Below is the complete guide for “Commodity Trading for Beginners”.
Commodities refer to the items defined as per the Foreign Currency Regulation Act (FCRA). Traders can buy and sell the products available in the commodity market through derivatives just as trading in stocks or equity. Investors can pick long or short positions while trading commodity derivatives on the National Commodity and Derivative Exchange (NCDEX) and the Multi-Commodity Exchange (MCX). Both exchanges are regulated by SEBI. Now commodity exchanges also offer options trading in selected segments.
To diversify the portfolio, investing in commodities is a good move. By investing in commodities, one can be part of involvement in global demand growth, helping in ideal asset allocation and hedging against inflation. There is a substantial risk associated when investing in this segment, which is offset by the significant returns that can be accrued.
The commodities traded on the various exchanges are broadly divided into four categories - Bullion, Agro commodities, Energy, and Base Metals. Gold and silver are examples of bullion commodities. Sugar, grains, and spices come under agricultural products. Aluminum, Copper, Lead comes under base metals. While crude oil and natural gas are categorized as energy.
To start commodity trading, a person needs a commodity trading account with a brokerage firm. Aadhar, photo identification, PAN card, bank statement, and canceled cheque are few documents that need to be submitted to open an account. The account opening process is completely online with some brokers while other brokers still need physical forms. To choose the best broker for commodity trading, please refer our detailed analysis – “Best Brokers for Commodity Trading in India”
Demand and supply are the two factors that mainly drive the commodity market. The government policies, political climate in the country and the world, and social changes all have an impact on commodity prices.
Commodity market also depends on the global scenario. It is essential to stay updated on the fluctuations and live commodity prices when placing trades. Making an informed decision can reduce the risk factors associated with the commodity market. Though investors may come across numerous commodity tips, it is important to distinguish between the good and the bad ones. Not every tip is from a reliable source, so be sure to conduct your own research and follow the findings.
It’s advisable to take subscription of a commodity advisory issued by your broker or some other experts. Irrespective of whether you have taken up online commodity trading, or are doing it offline trading. One key thing to remember is that information about demand and supply in the commodity market is not as accurate and controlled as in the equity market.
To diversify and balance the portfolio, commodity trading is the best choice. However, commodity trading is a good option only for investors who can afford to hold a position for a longer period. Trading in commodities is considered a risky venture. But at the same time, they offer quite a few benefits when compared to equities. Let us understand some of these benefits offered by trading in commodities.
Commodity trading is considered a high risk and reward investment approach. There are huge swings of prices in the commodity segment and making the right investments can help you convert these into spectacular profits.
Commodity trading is the best weapon to fight against inflation. When there is inflation, the value of the rupee falls. This leads to an increase in the prices of commodity goods, which can translate into profits for you.
The fact that commodity trading has lower margin thresholds makes it more lucrative to many. Margin refers to the money that has to be deposited with the broker before carrying out trades. This is usually somewhere between 5 to 10 percent, which is much lower than other asset classes like equity trading. This means trading in larger volumes while putting up very little money.
The commodities are high in liquidity. Poor liquidity in the equity market costs many traders when attempting to enter or exit positions. Many traders think that the commodity market is mere speculation or gambling. But that is not the case when the trader uses adequate information or knowledge about what they are doing. Good mix of equity and commodity makes a good portfolio. Online commodity exchanges like MCX and NCDEX make it easy to track online commodity prices and are regulated by SEBI.
The process of trading in commodities is similar to the equity market. The major difference is that in stocks/equity you are dealing with one company and its associated business model, whereas commodities trading depend on various factors like global parameters, economic parameters, demand and supply and so on.
|Associated Risks||Each commodity has cut off barriers – like Metal & Energy has 6%, Agri commodities has 4% cut-off.||Stocks also have cut off barriers but for some companies it’s up to 20% which is very high in case of market fluctuations.|
|Trade Timing||Commodity Trading open from 10 am to midnight that gives enough time to take opportunity to carry out trades.||The equity market opens from 9:15 am to 3:30 pm.|
|Ease of Trade||The commodities trading are just demand and supply.||For stock trading, one needs to depend on the performance of company, its management decisions and segment specific factors.|
|Return on investment||No options of dividend, It is completely market driven.||Can get the benefit of dividends.|
|Segments||Futures and Options||Delivery, Intraday, Futures and Options|
Commodity trading with discount brokers has an added advantage that the brokerage is very low. In terms of risk management, discount brokers have robust RMS system so you can limit your losses in case of volatile market condition.
|Broker||Commodity Brokerage||Exchange Support||Request Call Back|
|Zerodha||Rs 20 Per Order||MCX||Enquire|
|Alice Blue||Rs 20 Per Order||MCX, NCDEX||Enquire|
|Upstox||Rs 20 Per Order||MCX||Enquire|
|5paisa||Rs 20 Per Order||MCX||Enquire|
|Fyers||Rs 20 Per Order||MCX||Enquire|
Last updated on 2nd Nov 2020
There are 24 (Twenty-Four) commodity exchanges in India and 3 national level exchanges through which all permitted commodities can be traded. The three national level exchanges are
All these exchanges have an online trading and settlement system.
MCX started its operation in 2003 and regulated by SEBI. MCX is India's largest Multi Commodity Exchange that offers online trading of commodities derivatives transaction providing a platform for price discovery and risk management. In 2012, MCX became India's first listed exchange. All major brokers in India including Zerodha, Upstox, Alice Blue, Samco are trading members with MCX and offering hassle free commodity trading services to its clients.
|BULLION||Gold, Gold Mini, Gold Guinea, Gold Petal, Silver, Silver Mini, Silver Micro|
|AGRO COMMODITIES||Black Pepper, Cardamom, Castor Seed, Cotton, Crude Palm Oil, Mentha Oil, RBD Palmolein|
|ENERGY||Crude Oil, Crude Oil Mini, Natural Gas|
|BASE METALS||Aluminum, Aluminum Mini, Brass, Copper, Lead, Lead Mini, Nickel, Zinc Mini, Zinc|
Incorporated in 2003, NCDEX is India’s second largest multi commodity exchange. NCDEX is majorly engaged in Agri based commodities regulated by SEBI. IIFL, Edelweiss, Alice Blue are few of the known brokers that offer trading with NCDEX.
|CEREALS AND PULSES||Bajra, Barley, Chana, Maize Kharif/South, Maize Feed Industrial Grade, Wheat, Moong, Paddy (Basmati)|
|FIBERS||Kapas, 29 MM Cotton|
|GUAR COMPLEX||Guar Seed 10 MT, Guar Gum|
|OIL AND OIL SEEDS||Castor Seeds, Cotton Seed Oil Cake, Soybean Refined, Soy Oil, Mustard Seeds, Crude Palm Oil|
|SPICES||Pepper, Turmeric, Cumin, Coriander|
After the merger of National Multi Commodity Exchange of India Ltd (NMCEX), ICEX has become the third largest commodity exchange in India. ICEX is majorly engaged in agri-based commodities regulated by SEBI. In Aug 2017, ICEX gets SEBI approval for world’s first unique Diamond Futures Contract.
|Non Agri Product||Diamond, Steel|
|Spices||Black Pepper, Cardamom|
|Oil Seeds||Castor Seed, Mustard Seed, Soya Bean Oil|
|Others||Guar Seed, Isabgul Seed|
Gold is the most traded commodity on MCX. MCX offers 4 different combination of contract – Gold, GoldMini, Gold Guinea, and Gold Patel. MCX offers both Futures and Options trading for Gold, where options is limited for 1 product and futures for all 4 products.
|Contract||Trading Unit||Base Value||Max Order Qty||Contract Type|
|Gold||1 KG||10 gm||10 KG||Futures and Options|
|Gold Mini||100 gm||10 gm||10 KG||Futures and Options|
|Gold Guinea||8 gm||8 gm||10 KG||Futures|
|Gold Patel||1 gm||1 gm||10 KG||Futures|