The stock market has always been a paradise for traders and investors. They invest their savings in the stock market to make good returns and build a huge corpus over time. Another popular avenue for traders is commodity trading. Commodity trading in India has a long history. In fact, India is among the few countries that started trading in commodities since a very long time. Today commodity trading in India has a significant role and importance. In this article, we will walk you through the commodity trading basics and its related concepts in detail.
Let us first learn about the meaning of commodity trading.
What is Commodity Trading?
A commodity is a group of assets that are important to support our lives like metals, food, energy, etc. When such a commodity can be traded on an exchange and has a price change, they can be purchased and sold just like the stocks, this is termed as commodity trading. In India, there are four classified categories of commodities, they are:
• Agriculture – Includes items such as Corn, Coriander, Chana, Castor Seed, Wheat, etc.
• Energy – Includes items such as Crude Oil, Natural Gas, etc.
• Metals – Includes items such as Copper, Gold, Silver and Platinum
• Livestock and Meat – Includes items such as Eggs, Pork, Cattle, etc.
Commodity trading is a profession for many traders in India. The trader uses the price fluctuation in the above commodity prices to trade and find opportunities to make money.
Now that we know what it is, let us learn where you can invest in commodities in India.
Where Can You Invest in Commodities in India?
Anyone living in India can trade in commodities through the exchanges. There are six commodity exchanges in total where you can trade in India; they are
• National Commodity and Derivatives Exchange – NCDEX
• National Multi Commodity Exchange – NMCE
• Multi Commodity Exchange – MCX
• The Universal Commodity Exchange – UCX
• Indian Commodity Exchange – ICEX
• Ace Derivatives Exchange – ACE
Knowing about the commodity markets in India, let us now learn about investing in the commodity market.
How to Invest in the Commodity Market?
You can trade in the commodity market through a futures contract. In this type of contract, you enter into an agreement to buy or sell a specific quantity of a commodity at a future price. Every commodity is available for trading through the futures market. The traders, depending upon the predicted price movements take their position. Like for example, if the trader expects the price of a commodity to go up, he would purchase a specific quantity of the commodity and go long. Similarly, if the trader expects the price of the commodity to go down, the trader sells a specific quantity of the commodity and goes short.
As you are now aware of the ways through which you can invest in the commodities market, let us now know about the commodity trading time in India.
Commodity Trading Time in India
The commodity markets in India is open on all days of the week except Saturdays, Sundays and holidays declared by the exchange. The market timings of the Indian commodity market is as follows:
• Agri Commodities: 9 a.m. to 9 p.m.
• Bullion, Metals, Crude Oil and Internationally linked Agri Commodities: 9 a.m. to 11:55 p.m.
In the year 2018, The Securities and Exchange Board of India (SEBI) extended the commodity trade timing to the above timings in order to deepen the commodity markets as well as to increase the participation of stakeholders such as value chain participants, farmers producers organisations, foreign entities having actual exposure to Indian physical markets, etc.
There are many benefits of trading in the commodities market. In this section of the article, we will learn the benefits of commodity trading.
Benefits of Commodity Trading
Hedging plays an important role in commodity trading. It protects the traders from price fluctuations as they enter into an agreement at a pre-decided price.
Since commodity trading is very popular, traders speculate the future price movements and make heavy profits out of it.
There are instances when the price of a commodity varies in different markets. The traders take advantage of such a situation by arbitraging. They buy a commodity in one market where the price is low and instantly sell it in another market where the price is high.
Individuals wanting to trade in the commodities market often find it difficult to select a commodity broker. In the following section of the article, we will look at how the selection of a broker should be done.
How to Select a Broker for Commodity Trading?
Selecting the right broker is an important part of commodity trading as your whole experience in the commodity market will depend on it. While selecting any broker, you must look at their credibility and service record. Since your trading experience will depend on the services of a broker, check whether the broker provides the facility of commodity trading online. Another important criterion is the brokerage rates charged by the broker. So, the broker selection must be made after considering all these factors.
While selecting the broker, you must ask them to provide a demo of the services provided by them on their trading platform. Test the commodity trading online through the desktop or mobile application and understand the working of the platform. Another important factor that must be considered is the customer support team of the broker. Check how proactive and strong the team is to assist you during any problem or query. Understand with the broker the process of depositing the margin money. Last but not least, you must select the broker who is certified. IndiaNivesh is one such broker who is well known to fulfil all the above criteria and provide its clients with a hassle-free experience.
After selecting the right broker for commodity trading, you must open the commodity trading account. In this section of the article, we will learn about the process of opening a commodity trading account.
Opening Commodity Trading Account
The primary requirement for trading in the commodities market is to open a trading or demat account. All you need to do is fill an application form and submit documents like your identity proof, source of income, financial statement, etc. The broker then, depending upon the financial details submitted by the individual, approves or rejects the application. This is an important step as brokers want to be sure that the applicant will be able to meet the debt payments and he does not suffer the losses.
After opening a trading account, the next big question for a trader is how much minimum investment is required to trade in commodities. So, let us have a look at the minimum amount required for making the investment in the commodity market.
Minimum Amount Required For Investment
After opening the commodity account, you have to deposit an initial amount to start trading in commodities. Initially, you have to deposit at least 5% to 10% of the total contract value. Along with the margin money, the trader must pay a maintenance margin amount to the broker so as to cover the losses that may happen in case of adverse market situations.
Let us now read about the importance of trading strategies while trading in commodities.
Importance of Trading Plan
Trading strategies are very important in commodity trading. With the right trading plan, commodity trading can be very profitable. The commodity trading plan must be developed as per the financial objectives and risk-bearing capability. The trading plan of one trader may not be suitable for another trader. Therefore, the commodity trading plan must be prepared after conducting research and other necessary requirements. The most important part of commodity trading strategy is not to overtrade and always put a stop loss. Furthermore, the trader must put various risk management techniques to maximise his returns and minimise the risk in commodity trading.
IndiaNivesh is one of the leading broking firms that provide you all the assistance along with risk management techniques to make commodity trading a profitable venture for you.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.