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If not for the foundations for commodity markets laid in 1875, we would not be here. 1875 marked the inauguration of India’s first organised trading centre, the Bombay Cotton Trade Association.
Since 1875, commodity trading has undergone a tremendous transformation, and today, myriads of commodities are traded in the markets. Wait, let’s rewind a bit and learn about these commodities and then explore everything you need to know about commodity trading in India and how to trade in commodity market! Excited? Let’s dive into this blog!
What is commodity trading?
Commodities are primary goods or raw materials. They come with their own intrinsic value. What differentiates these commodities from other types of goods is that irrespective of their suppliers, there is no qualitative differentiation in the market.
These commodities are further classified into two types:
Hard Commodities: Any natural resource obtained through mining or various extraction processes falls under this category. These include rubber, oil, and metals like gold and silver.
Soft Commodities: On the other hand, any natural resource grown or cultivated is categorised as a soft commodity. Naturally, all the agricultural products, sugar, cocoa, etc, are soft commodities.
Alright, now you know what commodities are. Now imagine a marketplace where individuals buy, sell, and trade these commodities. That is commodity trading for you! This trading takes place in both perishable and non-perishable goods.
Ok, now you may ask why you can not simply go to your nearest retail store to purchase a bag of sugar instead of trading commodities on some online platform. When you buy, let’s say, 1000 kilograms of sugar at Rs. 45 per kilogram, you will be paying a total of Rs. 45,000. Also, it is not practical to stock 1000 kilograms of sugar for “trading” purposes.
Thus, you trade that on commodity exchanges to benefit from price fluctuations like you trade stocks. However, for commodities, you trade in Futures & Options (F&O) contracts.
When trading commodities on an exchange, you only have to pay a fraction of the money, depending on the margin. If the margin is 10%, you can avail yourself of this quantity at just Rs. 4,500 rupees.
In addition, commodity trading also enables you to diversify your portfolio and hence spread your risks. Most importantly, it provides you with a hedge against inflation because when you trade in commodities, you are essentially agreeing to buy a certain commodity at the current market price at a later date.
However, you may also experience losses if the commodity prices fall due to uncertainties or other factors.
Types of commodity markets
There are multiple ways to trade commodities. You can either trade commodities in the spot markets or the derivative markets. It is crucial to learn this to understand how to start trading commodities online.
- Spot market
Spot markets are the markets where immediate delivery of commodities takes place. In short, you are exchanging cash for physical goods. Here, the buying and selling takes place at the spot (market) price. This spot price can change within a split fraction of a second based on the number of orders and demand vs supply in the market.
- Derivative market
To learn how to start trading commodities online, understanding the derivative market is important. In the derivative market, you can either opt for futures or options contracts. Both these contracts involve trading the commodities at the current market price at a later date.
However, if you opt for futures contracts, you are obligated to make the purchase/sale as mandated by the contract, and if you want to exit your position, you would have to make a settlement by paying the contract rates.
In the case of options contracts, you have the right to make the purchase, but there is no obligation to make the trade. Both these contracts carry their own set of merits, so ensure you are well aware of their differences before you choose one!
How to trade in commodity market?
That was a lot of information about commodity trading, but the real question is: “How to start commodity trading?” Don’t worry; we have got that covered in the following step-by-step guide.
- Research your options
If you are serious about trading commodities, this is the basic step that you should start with. Find out the different kinds of commodities that are being traded. Sit down and closely observe how their pricing gets influenced by various factors such as demand and supply, geopolitical events, natural calamities, etc.
Okay, that is one research tickbox check. Now, you need to learn about the different types of exchanges where trading in commodities takes place. For instance, in India, it majorly takes place on the following four platforms:
- Multi Commodity Exchange (MCX)
- Indian Commodity Exchange (ICEX)
- National Multi Commodity Exchange (NMCE)
- National Commodity and Derivatives Exchange ((NCDEX)
Once you are confident that you have acquired all the relevant knowledge, you can craft an effective trading plan and move on to the next step.
- Choosing the right broker
Opting for the right broker is crucial if you want your trading experience to be hassle-free. There are two types of brokers that you can choose from.
The first ones are full-service brokers who have physical branches, and naturally, they charge higher prices because, well, you guessed it right, they have to recover their establishment costs.
The second type of brokers are the discount brokers, who follow a lean model and mostly operate in online mode. These brokers offer a broad range of services at competitive and cheaper prices.
Again, remember to ensure that the broker you choose abides by the SEBI guidelines and offers user-friendly services.
- Get started with your account
Depending on the broker you choose, the number of documents you submit to verify your identity varies. Some commonly asked documents include your Aaadhar card, PAN card, and income statements.
Fill out the form and submit all the relevant documents, and once your account is verified, you can proceed with the next step.
- Time for making that first initial deposit
The first initial deposit should usually be around 10% of the contract value of the commodity you have decided to buy. You must maintain a maintenance margin along with this initial deposit or margin.
This is the amount that compensates for any losses that you might make. This margin also ensures that your contract remains valid.
- Trade commodities
Remember we asked you to do thorough research about the markets? This is where that knowledge is going to be handy. Remember to be patient while you assess the market positions and decide whether you want to buy or sell contracts in the market.
Execute the orders once you find a commodity that fits your risk profile and financial objectives. Also, remember that commodity trading only takes place during certain hours. For instance, the MCX operates between 9.00 AM and 11.30 PM. Also, know when the exchange will be closed due to holidays.
And that’s a wrap on How to start commodity trading.
Conclusion
While today’s highly sophisticated and digitalised commodity trading took shape recently, commodity trading has found its roots in ancient days. If you also want to prosper by trading in the commodity market, ensure that you follow this guide carefully and remember to arm yourself with all the necessary information! Subscribe to StockGro to learn more about trading and investing.
FAQs
Commodities are the raw materials which are traded on commodity exchanges such as MCX, ICEX, NMCE, and NCDEX. Based on the commodity selected, you can select any of these exchanges for commodity trading in India.
The Securities and Exchange Board of India (SEBI) is the body that is responsible for regulating the commodity markets in India.
While the specific document requirements are based on the platform you are trading on. Identification documents, resident proof, income proof and bank statements are the common documents that you need to submit for commodity trading in India.
No, the margin requirements may change based on the type of commodity you wish to trade. You need to add an initial margin when you start commodity trading online and have to maintain a maintenance margin, too.
No, it is not compulsory. You can either accept physical delivery of commodities or go for cash settlement. The latter is the most commonly preferred option for traders.
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