Commodity trading was not simple a few years back. Retail investors found it hard to understand the basics of trading. However, SEBI has made this trading simple with the help of brokers. Do you still not understand how to start commodity trading? Don’t worry, continue reading this blog to understand the basics.
- What is a Commodity Market?
- How to Trade in Commodity Market
- Commodity Trading
- Conclusion
Topics Covered :
What is a Commodity Market?
There are markets where commodities are bought and sold. Commodity markets can be of two types. The first is a spot market where commodities are physically purchased and sold. It means you will possess the commodities in real life after purchasing them. The other one is the F&O (Futures & Options) market, where commodities are traded via financial contracts.
When we talk about commodity trading, we are usually discussing trading via financial contracts. You can find financial contracts based on underlying commodities on commodity stock exchanges in India. National Commodity & Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX) are some exchanges in India that can offer commodity trading services.
How to Trade in Commodity Market
Do you understand how to start commodity trading online? If not, you are missing out on profit-making and hedging opportunities. Before discussing the online trading methodology, it is essential to understand what is commodity Trading .
A commodity is a raw material in its physical form that can be traded in financial markets. There are agricultural commodities like grains, oilseeds, and softs. Investors are also interested in energy commodities like natural gas, coal, and crude oil. Similarly, metals, livestock, forestry, dairy products, and spices are other categories of commodities. You can find local markets near you where these commodities are traded in their physical form.
As discussed above, online commodity trading is more focused on F&Os. Because of this, spot markets aren’t considered in the context of trading. A futures or options contract’s value will be based on any underlying commodity. You might get the right to buy or sell an underlying commodity at a predetermined strike price on the expiration date by purchasing a futures contract. You can also choose an options contract to buy and sell commodities on a future date. However, you aren’t forced or obligated to purchase or sell commodities in options contracts.
While most investors trade in the commodity market through F&Os, there are other options too. You can invest in commodities through ETFs (Exchange-traded Funds), ETNs (Exchange-traded Notes), mutual funds, OTC (Over-the-Counter) derivatives, physical ownership, commodity-linked bonds, and commodity pools.
You must first choose a broker to start trading in India. The commodity broker will offer access to a commodity exchange, like NCDEX or MCX. You must also apply for an investment account or a specialised commodity trading account with the broker. The trading account will allow you to purchase and sell commodities on stock exchanges. The broker will also provide a trading platform for price discovery, research, and analysis. You can view historical and current price movements of different commodities on the trading platform and make investment strategies accordingly.
Since most investors start commodity trading via financial contracts, there is no need for a Demat account. You don’t need a dematerialisation account to hold financial contracts (futures and options). However, you must still apply for a Demat account with your broker. When you have a Demat account, you can choose mutual funds and ETFs that invest in commodities. Not to forget, a Demat account helps store diverse securities in an electronic form.
When you apply for an investment account or commodity trading account, you must complete the KYC (Know Your Customer) process. It is a verification process mandatory for investors to complete. You must provide basic details and KYC documents to the broker. KYC documents will include a PAN card, Aadhaar card, cancelled cheque, and other documents. You cannot start commodity trading in India without KYC verification.
Once you have a trading account and a research platform, you are free to trade in a wide range of commodities. However, you must research and find profitable commodities to invest in. You must also develop trading strategies to achieve financial goals. Don’t forget to collect information regarding the opening and closing hours of a commodity stock exchange. You must place your commodity order within the given time. Also, monitor your trades and portfolio(s) to make informed decisions.
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Commodity Trading Strategies
It can help you with hedging. It is an investment strategy used to shield the portfolio from adverse commodity price movements. Investors can also indulge in price speculation through commodity trading. For instance, you might feel that the price of agricultural commodities will increase in the future. In such a case, you can purchase an options contract to sell commodities at a lower price in the future. If the market prices do not rise, you can choose to ignore the options contracts on the expiration date.
Many investors depend on arbitrage opportunities to exploit the price discrepancies between two commodity markets. You can also indulge in spread trading to benefit from price discrepancies between related commodities. You can also start commodity trading in India based on the season. For instance, many investors trade agricultural commodities based on their harvesting season. You can also follow a contrarian strategy while trading commodities. Contrarian traders take market positions opposite to market sentiments, as they hope for price reversals.
Recommended Read: What is Option Trading
Trend following, swing trading, range trading, and risk management strategies are also widely considered for commodity traders. Take some time and develop your trading strategies before making investment decisions.
Conclusion
Anyone can start commodity trading with the help of a reputed broker. You need to open a trading account to gain access to a commodity stock exchange. Don’t forget to develop effective trading strategies beforehand. Happy trading!
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