Commodity market in India has a great bearing on our routine lives. The prices of fuel, gas, things at the supermarket, jewellery, etc. are dependent on the prices of the commodities in the commodity market. Since there is a great significance of price change in the commodity on our routine lives, it suggests that commodity if rightly traded can give good returns. This provides an opportunity to the traders to trade in the commodity market and take advantage of the price movement to their benefit. In this article, you will learn about all the details that a beginner must know while entering into a commodity market in India.
Let us first learn the basic concept of commodity and its meaning.
What is a Commodity?
To define commodity in simple words, it is the material that is used as an input for producing refined goods. It is only because of the commodities that we are able to use the goods around us. Examples of commodities include copper, iron, aluminium, zinc, lead, crude oil, natural gas, gold, silver, steel, cotton, grains, pulses, etc.
After learning the meaning of commodity, let us now learn about the meaning of commodity trading.
What is Commodity Trading?
Commodity trading is very similar to stock trading. In stock trading, you purchase and sell shares of the companies, while in commodity trading you purchase and sell commodity products. The commodities are traded on the exchanges where traders look for making profits from the volatility in the commodity market by purchasing and selling them.
Let us now learn about the different types of commodity markets in India.
Types of Commodity Market
There are two types of commodity markets in India first are spot market and second are futures market. Spot market is a market where physical commodities are purchases and sold. E.g. Agriculture mandies. Futures markets are the market were commodities are purchases and sold in electronic form through various commodity exchanges.
In India, there are three major commodity exchanges where you can trade different commodity items. They are as follows:
• National Commodity and Derivatives Exchange – NCDEX
• Multi Commodity Exchange – MCX
• Indian Commodity Exchange – ICEX
From the above, MCX and NCDEX are the two most popular exchanges. On MCX, you can trade in metal and energy and on NCDEX; you can trade in agriculture products. ICEX is known for Diamond trading.
The commodities traded on these exchanges can be classified into four types.
• Energy – Crude oil, Natural gas
• Precious Metals – Gold, Silver, Platinum
• Base Metals – Aluminium, Copper, Lead, Nickel, Zinc, Steel
• Agriculture – Corn, Beans, Rice, Wheat, Pulses, Spices, etc.
Let us now learn who regulates the Indian commodity market.
Regulation of the Indian Commodity Market
The regulatory body of the commodity trading market is the Securities and Exchange Board of India (SEBI). Earlier, the Forward Market Commission (FMC) used to regulate the commodity market. But in 2015, FMC got merged with SEBI.
As a beginner, you must know how to trade in the commodity market. In the section of the article, we will learn all the details of how trading can be done in the commodity market.
How To Trade In Commodity Market
The best way to trade in the commodity market is through the futures contract. In a futures contract, there is an agreement to buy or sell a particular commodity at a given price at a future time. Future contracts are available for every commodity. The traders use the volatility in the price of the commodity to make profits. The beginners in the commodity market must begin with small trades so that they understand the risks well and get the experience of taking big trading positions in future.
Let us now learn about the advantages of commodity trading in the futures market for beginners.
Advantages of Futures Market in Commodity Trading
• The volume of trade in the future market is good which makes future contracts very liquid in nature.
• When the trade is taken carefully, the future contracts can give you huge profits.
• The targets in the long or short future contracts can be easily set.
• Futures contracts are highly leveraged investments.
• They are affordable as they require minimum deposit to open an account and in return, you get control over full-size contract.
Let us now learn how to choose a commodity broker in the commodity market.
How to Choose a Commodity Broker?
Your entire experience in the commodity market will depend upon the broker you select. The commodity market has grown significantly over the past few years and there are numerous brokers present in the market.
While selecting a commodity broker, you must check their credibility and past experience. Another important aspect that you need to check is the charges that the broker quotes and services offered by them. Also, the broker must have a proactive customer support team. This is because whenever you face any problem or snag, it can be addressed immediately. Moreover, it is advisable to compare the different brokers and select the one who provides the services at the most affordable rates.
Let us now learn how to open a commodity trading account.
How to Open Commodity Trading Account
After selecting the broker of your choice, the next thing to do is open the commodity trading account. You must follow the below mentioned steps for successfully opening your account.
- The first thing to do after the selection of the broker is to fill the account opening form. These forms are available on the broker's website and can be obtained from their offices too.
- The next step involves the submission of the necessary documents that include PAN card, ID proof, address proof, cancelled cheque and income statement.
- Now the broker will conduct a verification process to check whether the information submitted by you is correct or not.
- On receiving the approval from the exchange, the commodity account is opened. The beginners get the information about their account number, password and other necessary details.
- On the opening of the account, you must submit the deposit margin money. The initial margin money is as low as 5%-10% of the total contract value. Apart from the initial margin, the maintenance margin also needs to be maintained by the account holder.
Trading in the commodity market can change your fortune. The sky is the limit to make money in the commodity market. Just follow a disciplined approach and you can be a successful commodity trader.
If you are looking to open a commodity trading account, you can consider IndiaNivesh Commodities Private Ltd. We provide the best services at the most affordable rates. Our in-house experts and analysts give you the right guidance for the next trade that you should take. For further information, you may get in touch with us via email or call. We will be glad to serve you.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Mutual funds are one of the most popular investment options available in the market. Most people prefer investing their savings in mutual funds because they have the ability to generate good returns over a longer horizon. You can regularly invest your savings into the mutual fund's schemes through Systematic Investment Plan (SIP) or a lump sum amount. However, to do so you must be aware of the top performing mutual funds in India. To help you in overcoming the confusion of selecting top mutual funds, we have listed down top mutual funds to invest in 2019.Top Performing Mutual Funds In India in 2019Let us now learn the factors that you must consider to select top mutual funds.Factors to Consider Before Investing in Mutual Funds • Performance of FundThe performance of the fund is critical for the selection of any top mutual fund scheme. The performance tells you about the returns generated by the scheme over the years. You must ensure that the performance of the fund is taken over a long period so that you can make a better judgment and decision. Also, review the holdings of the fund in the past years. Check the risks that the fund is exposed to. By doing all these checks you will get a better idea of the fund’s performance. • Fund Manager’s ExperienceThe experience of the fund manager plays a critical role in generating returns. The fund manager manages the capital of the mutual fund schemes and invests in the direction the market is moving. A good fund manager ensures that the mutual fund scheme is reliable for the long term. The mutual fund scheme can perform well only if the fund manager has the expertise and experience. Therefore, before putting your hard earned money into any top mutual fund, always consider the experience of a fund manager. • Expense RatioThe expense ratio is the fee that is charged by the AMC when you purchase their mutual find scheme. It is the charge for management, distribution, administration and promotion of a mutual fund. SEBI (Securities and Exchange Board of India) has capped these charges at 2.25% of the total fund assets. It is always recommended to purchase that mutual fund scheme which has a lower expense ratio. • Exit LoadExit load is a charge that is applied to the NAV of the mutual fund. It dents your investment value when you sell your units. The mutual fund schemes that charge lower exit load should always be considered as the first choice for investment. Since the exit load charge is applicable whenever you sell your mutual fund units, it is advisable to hold mutual fund units for the long term and reap its real benefits rather than exiting in the shorter period. • Track Record of Asset Management Company (AMC)Asset Management Company (AMC) is the fund house that manages the mutual fund scheme. The decisions at an AMC are taken by the Chief Investment Officer (CIO). If any poor stock is a part of the AMC then it raises questions on the selection of stocks done at the AMC level. Therefore, it is always recommended to track the past record of an AMC before investing in any of the top mutual fund schemes. • Integrity of Fund’s PromotersBefore investing in the mutual funds, it is important to understand who the promoters of the mutual fund are? You must look at their record in the financial service domain and experience. Securities and Exchange Board of India (SEBI) grants the permission to run a mutual fund only to people who have integrity, experience in the financial service sector and fulfils the criteria of minimum net worth. Even after that, it is important for you to check their background for your own satisfaction. The above mentioned are a few factors that you must consider before buying a top mutual fund scheme. Whether you are a beginner or a seasoned investor, you must be always active and alert while making an investment in the mutual fund scheme. To make things easier, you may invest in mutual fund through IndiaNivesh Ltd. Our in house experts understand your financial goals before suggesting you the apt mutual fund scheme. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
For many investors, the next gradual step after mastering the stock markets is venturing into the derivatives segment. Derivatives consist of two key products in India – Futures and Options. However, trading in these can be a tricky business and one can go wrong on many counts. But before we warn you of the pitfalls that you need to be careful of, it is important to know what are futures and options. Correct understanding of futures and options plays an important role in making the best out of investments in this segment. Read on to understand the nuances of the F&O segment and how to trade in futures and options. Similarities between futures and options Both futures and options belong to the family of derivatives. For the uninitiated, derivatives are financial contracts whose value is derived from an underlying asset (such as securities) or a group of assets (benchmarks such as indexes). Other examples of underlying instruments are bonds, commodities, interest rates, stocks, etc. They are trading products which offer the investor a chance to make profits and hedge their current investments Both futures and options trading happens in the stock market. Difference between futures and options The major difference between futures and options lies in the obligations or rights of the involved parties. In the case of options, the holder of the contract has the right to purchase (or sell) the underlying financial instrument or asset at the pre-determined price. However, he or she is not obligated to do so. The seller, on the other hand, needs to compulsorily perform their part if the holder chooses to exercise his or her option. In simple words, the holder has an “option”. In the case of a futures contract, both parties have an obligation to fulfill their part of the contract on a specified date in the future at a pre-determined price. In terms of risk, futures are riskier than options. The holder of the futures contract is obligated to buy on the future date at the fixed price even if the security moves against him or her. However, in an options contract, the holder can choose not to no go through if the security price does not move as per his/her expectation. There is an advance payment involved with options contract. The holder of the contract has to pay an amount or premium to get the right to buy or pass in the future. In case the contract holder chooses not to exercise the right, he/she will lose this upfront payment amount. No such charges are there in a futures contract as both the parties need to honor their obligations on a certain date. In the case of a futures contract, the transaction takes place on a pre-determined date. Futures and options may be conceptually different but their core principle is the same. They provide a chance to make a profit from an index, stock or any other underlying asset without investing the entire sum. Understanding future and options Now that you know the difference between futures and options, you might think that you are all set to venture into this segment. However, before you do that it is important to understand some important facts about futures and options Futures and options are traded on the stock market. The F&O segment contributes to the maximum trading volume across stock exchanges in the country. The calculation of profits (or losses) is done daily till the time of sale or contract expiry. Unlike the equity market, derivatives come with an expiration date. There are hidden costs involved in the F&O segment. These include brokerage, stamp duty, GST, STT, etc. Options contracts are asymmetrical. In case the price of a stock goes down, the buyer's loss is restricted to the amount of premium paid. However, the seller's loss is limitless potentially. Trading in options is possible even when one is unsure about the market’s direction. One can combine futures and options to trade markets in such situations. One of the USP of the F&O market is the flexibility to choose a non-directional strategy. Things to avoid while trading in futures and options If you wish to trade in futures and options, there are some mistakes you need to steer clear of. Futures Trading Use futures as a trading proxy: This is one of the biggest (and most common) mistakes made by investors in the F&0 segment. The power of leveraging works both ways – in your favor and against it. Futures have the potential for unlimited profits as well as losses. So, one should not get lured by the possibility of exponential profits without considering the impact of losses. Ignore the stop/loss feature: Many people do not make effective use of this important feature. The stop/loss feature is a great risk management tool. One must remember that leverage is a double-edged weapon. It can help as well as hurt. It is important to maintain a disciplined and rigid stop/loss target at the time of trading. On earning the set or desired profit, one must use this feature to exit from the futures position. Sell if another institution is doing so: A big part of the future trading is to create a cash-future arbitrage. Hence, do not start selling your future contracts just because some other institution is doing so. It might be trying to create a position of arbitrage. Following the herd is not a wise way of trading in the F&O segment. Options Trading Get attracted by cheaper-priced options: Naturally one would prefer low-priced options as the advance premium payment would also be lesser. However, in such cases, it is important to assess the intrinsic value of that particular option to determine if it is truly underpriced. Holding longs closer to the date of expiration: There are two factors that impact the valuation of options – intrinsic value and time value. As the date of expiry comes nearer, there is a sharp dip in the option price (if it is going to expire at zero value). Hence, timing your exit and setting the target return are crucial aspects to be considered in options trading. Else, one might end up making losses. How to trade in futures and options Once you have a thorough understanding of futures and options, it is time to choose an intermediary for your trading purposes. This is a crucial step as the right partner can help you select the right investment opportunities and make the most out of your hard-earned money. IndiaNivesh is a great choice for all your financial needs. With a rich experience of more than a decade, it offers best-in-class and customized services to its customers. Its in-depth understanding of the market combined with cutting-edge technological tools enables them to support customers holistically. Their long list of recognitions stands testimony to the passion and excellence they display in the financial world. So, make the right choice of partner and keep it simple. Futures and options are not rocket science once you understand their nuances. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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