Commodity Trading for Beginners in India

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”.

Concept of Commodity Trading in India

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.

Different types of commodities traded in India

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.

How to start commodity trading in India

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”

Driving Force for commodity market 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.

Advantages of Commodity Trading

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.

• Better returns

  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.

• Security against Inflation

  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.

• Lower Margin Thresholds

  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.

• More Liquidity

  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.

Commodity Trading Guidelines

• One needs to diversify the portfolio with the mix of equity, mutual funds and commodity.
• Either equity trading or commodity trading, investors should follow analyst’s guidelines and also should do own research before investing.
• Trading in equity or commodity markets is risky, so it’s advisable for investors to use stop loss order so they can minimize the losses.
• Diversify the portfolio under a segment itself i.e in commodity market also doesn’t put all the investment in one basket, use different commodities instead.
• Avoid common mistakes when trading like lack of diversification, over trading, failure to maintain stop loss, failure to define exit criteria, no planning and no patience.
• Always open an account with SEBI registered broker. They have a strong risk management system.