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.