Commodity Trading
Despite the shift towards stock markets, commodity trading continues to be an essential part of the Indian finance world. Just like the name suggests, commodity trading refers to trading commodities or a group of goods or assets. These goods are things that we use in our day-to-day lives like coal, gas, gold, silver, coffee, wheat, meat, rubber, etc. The activity of buying and selling these products to earn profits is known as commodity trading.
Commodity trading is a great way for investors to diversify their portfolios. Since the prices of commodities move differently from stocks, many investors use commodity trading to counter the effects of inflation. Commodity trading has, in a way, existed since ancient times. Merchants have always exchanged goods as a way to earn more money or increase their assets. However, with the introduction of the stock market and exchanges, commodity trading has now evolved to a more formal form of buying and selling. While earlier, people bought and stored goods in their physical form, investors today invest in different commodities on the exchange.
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What are Commodity Exchanges?
Just like the stock market, commodity trading also requires a dedicated market where buyers and sellers can trade their commodities. A commodity exchange is a market space where people can buy and sell commodities. There are six national commodity exchanges for commodity trading in India:
- Multi Commodity Exchange also known as MCX
- National Commodity and Derivatives Exchange or NCDEX
- National Multi Commodity Exchange or shortly referred to as NMCE
- Indian Commodity Exchange or ICEX
How to do Commodity Trading?
Commodities can be bought and sold in the market, similar to shares and equities. Investors need to first identify the commodity that they wish to trade. They can then buy this commodity at a low price and predict its rate of appreciation in the future. When the commodity’s value reaches the appreciated price, they sell it to earn a profit.
Investors also trade with a future contract wherein they agree to buy or sell a pre-determined amount of a commodity at a fixed price in the future. This is useful to hedge unwanted risks in the future. Commodity exchanges function from Monday to Friday between 10:00 a.m. and 11.30 p.m. or 11.55 p.m. IST, as per the U.S daylight saving time.
What are the benefits of Commodity Trading?
Commodity trading has many benefits and is a great avenue for investors to increase their financial pool. Here are some of its advantages.
- Allows Diversification: Diversification is an essential part of every portfolio as it helps investors counter the risk of some investments. Commodity trading offers the ideal playground for diversification, thereby reducing a portfolio’s risk probability.
- Eliminates the Risk of Manipulation: Commodity markets are generally regulated by international price movements which take out the possibility of any internal price manipulation.
- Helpful in Countering Inflation: Unlike any other investment product, the prices of commodities move in the same way as inflation.
Why invest with Religare Broking?
Religare Broking offers online commodity trading options with many benefits, such as:
- A smart portfolio tracker that gives accurate, up to the minute reports of your investments.
- Commodity reports with essential trading information that can help individuals pick the right commodities for trading.
- The ease to trade from a phone, tablet, or laptop.
- No hidden transaction fees.
Religare Broking Research
Proper research and market understanding is a vital part of investing. Religare Broking offers the expertise of its experienced and insightful professionals who conduct periodic on the ground research to assist investors in making the right decisions
Based on the team’s research and market study, we offer real-time recommendations and powerful research and analytics that suit every individual’s unique investment goals.
What are the various types of commodities?
Agriculture
This includes commodities like sugar, wheat, rice, lentils like channa, rajma, as well as spices like cumin, etc.
Energy
Energy trading includes crude oil and its products like gasoline, coal, natural gas, kerosene, diesel,
wind power etc.
Metals
Precious metals like gold, silver, platinum, etc., and industrial metals like copper, aluminium, etc. are included in this category.
Meat
This group comprises livestock like pork, meat, cattle, beef and their produce like eggs, milk, etc.
Frequently Asked Questions
A commodity exchange is an association or a company or any other body corporate that enforces rules and regulations for trading commodity contracts and interconnected investment products.
Commodity trading in India is regulated by the Securities and Exchange Board or SEBI. In addition to this, the Commodity Derivatives Market Regulation Department or CDMRD overlooks the everyday operations of trading.
Commodity Market participants can be classified into three major categories i.e. hedgers, arbitragers, and speculators. In other words, manufacturers, traders, farmers, exporters, and investors are all the participants in this market.
Transactions in commodity exchanges are based on the online trading system. It is an order-driven trading platform, which is reachable to the various participants through the internet, VSAT, and leased line modes operated by members or subbrokers spread across the country.
Commodity trading lets individuals place comparatively bigger bets with a small amount of money. This increases their chances of earning significant profits. These investments also offer liquidity.
A derivative is a product where the derivative value is derived from the value of one or more underlying variable or asset in a contractual manner. The asset can be equity, foreign exchange, commodity or any other asset.
Commodity futures are like index or stock futures. They serve as a contract to buy and sell commodities at a future date and time.
Futures prices are determined by the interaction of bids and fluctuations in that asset across the country which converges on the trading floor. The bid and offer prices are based on the fluctuations of prices on the maturity date.
Farmers, investors, importers, exporters, large scale consumers like jewellers, textile mill owners, agricultural credit providing firms, speculators, etc. commonly trade commodities in India.