Commodity Trading Account: Meaning, Opening Process, Benefits

Commodity trading involves buying, selling, and trading commodities. It can be any primary agricultural product or raw material that is bought or sold. Products like metals, crude oils, wheat, gold, oils, etc. In addition, you can open a trading account with a commodity broker or a commodity exchange trading member.

Moreover, the benefits of opening a commodity trading account are numerous as well. This can help you diversify your investment portfolio, increase returns, and get exposure to global markets. Also, you can take advantage of price movements in commodities such as gold, silver, crude oil, and agricultural products by opening a commodity trading account.

The right research and strategy can make commodity trading a profitable investment. So, if you want to trade in a commodity you need to open a commodity trading account with a broker. Additionally, commodity trading is now managed electronically. This post will show you how to open a commodity trading account and the key points to remember when trading commodities.

What is Commodity Trading?

Commodity trading is the act of buying and selling commodities on the stock market. They can also be physical substances that are extracted, mined, or grown, rather than manufactured goods and services.

Moreover, commodity markets primarily deal in derivative instruments like futures and options. In this trading, traders place orders that will be executed at a future date. Price information for these instruments is readily available on the commodity exchange.

There are four main categories of commodity trading: 

• Energy is a broad category that includes necessities like kerosene, coal, petrol, diesel, petrol, natural gas, etc.
• Meat includes animals, pigs, beef, eggs, and other animal- or meat-related items.
• Agricultural Products: rice, wheat, sugar, lentils, spices, and other agricultural products
• Metals, which also include jewels, diamonds, platinum, silver, aluminum, and copper, are precious materials.

And Similar to stock prices, they fluctuate with global demand and supply. Now, let us see how to open commodity trading in the next section.

How to Open a Commodity Trading Account

The following steps will explain how to open a commodity trading account:

The first step in commodity trading is to open an account with a reputable broker. You can open your commodity account both online and offline.

• Step 1: You have to fill out the application.

• Step 2: You need to submit standard Know-Your-Customer (KYC) documents for account verification. The following are the documents.

Identity proof: a passport, voter's ID, driving license, PAN card, and Aadhaar number

Address proof: driver's license, passport, voter ID, Aadhaar card, utility bill, phone bill, gas bill, rental agreement, mortgage agreement, ownership agreement, etc.

• Step 3: You and the commodity broker will need to sign a member-client agreement. The details are as follows:

A non-judicial agreement is prepared.

The document outlines the broker's obligations and responsibilities, as well as their terms of service. In some agreements, brokers also list their fees and charges. So, be sure to read the agreement carefully to learn what services are available to you and how much you might be charged.

You need a stamp from a legal authority. As a sign of validity, a revenue stamp will be affixed to the agreement. Depending on the applicable state laws, you will also have to pay stamp duty and registration fees.

• Step 4: You need to submit proof of income. Here's a list:
• Statements of your business accounts
• Form 16 or ITR V
• Last six months' bank statement
• Certificate of net worth
• Certificate of demat holdings
• Step 5: You have to link your commodity trading account to your demat account. From this account, derivatives can be credited or debited. Therefore, you need to submit the details of your demat account.
• Step 6: With your margin account's initial margin deposit, provide a check. Using this balance, you can trade commodities. However, the deposit amount may vary from broker to broker. So, before opening a trading account, confirm the amount with the broker.

How To Open A Commodity Trading Account: The Application Process

Submission of documents: When you submit your application online, all your documents will be sent to the commodity broker's headquarters for processing. If you prefer, you can submit the documents in person at the nearest branch office.

Fees for activating accounts: To activate your account, the broker will charge you a nominal fee. Also, your current broker might offer a fee reduction if you open an account with them.

Waiting for processing: Each commodity broker takes a different amount of time to process your account opening. Moreover, the documents get to the broker faster when you submit them at a branch office.

ID for trading: As soon as the account is activated, the broker will set up an account for you and give you a trading ID. After that, you have to log in to your account and change your password.

Documents Required to Open Commodity Trading Account

The broker must get the following documentation before opening a commodity trading account.

• Minimum demat holding of Rs. 100 
• ID and Address Verification 
• Bank Statement
• Cancelled cheque
• Salary Slip

How To Open A Commodity Trading Account: Key Points To Remember 

As soon as your account is activated, you can begin trading. However, check your account to make sure your margin is reflected. If not, contact your broker immediately.

Moreover, learn how to use the margin calculator before you begin trading commodities. Such a calculator is available on most brokers' websites. Using it, you can find out how much you can spend against a certain margin amount.

If you trade derivatives, your gain or loss on the trade will appear in your margin account. You will have a dip in your margin account if you make consecutive losses. Then, to continue trading, you will need to add more funds. Conversely, if a trade yields a profit, it can be exited to collect the gains.

Benefits of Opening Commodity Trading Account

Opening a commodity trading account has a lot of benefits. Let's examine those in further depth using examples.

Diversification

Commodities and equities have little to no connection. Commodities are often the raw materials required to create the finished goods. Rising manufacturing costs as a result of rising commodity prices drive down profits, leaving little for shareholders, and lower earnings per share.The stock values eventually decrease as a result of this.

Additionally, because future cash flows will be able to purchase less goods and services than they would today owing to inflation, the present value of future cash flows paid by stocks decreases. The value of the stock drops, and the stock prices drop as a result. As a result, equities do well when inflation is constant or slowing. Commodities, however, perform better when inflation is increasing.

E.g., Car sales decrease as a result of rising ownership costs as a result of rising oil prices. As a result, vehicle stock prices decrease as well. Similar to this, rising metal prices raise the cost of construction, which reduces demand for real estate and causes real estate stock values to decline.

Protection Against Inflation

The price of products and services rises when demand for goods and services rises because the cost of raw resources, or commodities, also rises. Interest rates rise in such an inflationary climate, raising the cost of borrowing and lowering the company's net profitability as a result. The earnings distributed to shareholders also change as the company's income declines.

Therefore, stock prices decrease during periods of inflation. In contrast, the increased demand causes significant price increases in the raw materials needed to manufacture completed items, which eventually drives up the cost of the finished goods. As a result, investors turn to commodities futures to shield their money from inflation's impacts and keep its value.

Defend against uncertain global developments

Geopolitical events like conflicts, riots, and wars interrupt the supply chain, which leads to a lack of resources since it is more challenging to procure and transport raw materials to the factories that turn them into final products. 

In such a scenario, the supply of raw materials is impacted, which leads to an imbalance between supply and demand, driving up commodity prices rapidly. When such things happen, the market becomes pessimistic, which causes stock values to decline sharply. Consequently, purchasing commodities can assist in reducing portfolio losses.

High Leverage Facility

Leverage levels for commodity derivatives, such as futures and options, are unusually high. Paying merely 5% to 10% of the contract value as upfront margin allows you to hold a sizable stake. Any small change in the commodities' pricing has the potential to provide exponential gains. Therefore, utilising leverage in commodities trading opens the door to the prospect of extremely high gains.

Although it might fluctuate, the minimum margin for commodities futures is substantially smaller than buying equities. For wheat futures, for instance, you just need to deposit 23% of the whole trading value as first margin.

Transparency

Trades in commodities are now carried out on an electronic trading platform that is open to all market participants, as opposed to the outcry method in the past. Without the involvement of the buyer and seller, a fair price may be determined thanks to widespread participation and the computerised trading platform. Supply and demand determine prices, excluding the possibility of manipulation in any way.

Conclusion

Opening a commodity trading account offers you several benefits such as portfolio diversification, increased returns, and exposure to global markets. By following the step-by-step guide outlined above you can open a commodity trading account with a broker.

Moreover, it is important to remember key points in commodity trading. These include monitoring your margin, using a margin calculator, and being aware of the risks involved in trading commodities.

Overall, if you know how to open a commodity trading account with a reputable broker and have the right strategy and research behind it, it can be a profitable investment. Additionally, if you are new to trading and need help understanding it, you may check out the user-friendly blinkX trading app, which provides online support and direction.