What is Commodity Trading
- 12 Jan 2024
- By: BlinkX Research Team
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Commodity trading involves buying and selling commodities, which are tangible goods used in everyday life as well as raw materials used in finished products. Also, many factors can influence commodity prices, including government policies, geopolitical tensions, and the global economy.
However, before investing in commodity trading, it is important to understand the commodity market and the trading platforms available. To help you make informed decisions about commodity trading in India, this article describes in detail what is commodity trading, its types, commodities exchanges, methods of commodity trading and more.
Understanding Commodity Trading in India
Commodities are raw materials used in various industries, including food, furniture, and gasoline. They include agriculture products, metals, and soft commodities like sugar, cotton, cocoa, and coffee. Commodities have become an asset class since the 90s, with commodity futures indexes and investment vehicles benchmarking against them. Commodity trading involves buying and selling commodities like grains, cotton, fuel, sugar, gold, copper, zinc, and cotton. Prices are determined by demand and supply, with factors like government policies, geopolitical tensions, the global economy, and production also impacting prices.
For example, reduced rains could affect the cotton supply and raise cotton prices in that year. Likewise, the advent of electric vehicles may reduce the demand for fuel and reduce its price.
Moreover, there are different types of commodity trading contracts whose value is derived from the underlying commodity. In India, there are three types of commodity contracts: spot contracts, futures contracts, and options contracts.
- Spot contracts are instant contracts for the trading and settlement of commodities.
- In commodity futures trading, future prices are standardized. With a futures contract, the buyer has the right and the obligation to buy the commodity at a predetermined rate in the future, while the seller must sell it at the same rate.
- A commodity options contract gives the buyer the right to purchase the commodity at a specified price in the future, but not the obligation to do so.
Typically, commodity contracts require delivery at the end, either as a delivery or as a cash settlement. On termination of the contract, delivery refers to the transfer of the physical goods. Whereas, cash settlement involves the settlement of differential prices in expectation. In most cases, cash settlements are preferred over delivery.
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Table of Content
- Understanding Commodity Trading in India
- Types of Commodity Trading
- Types of Commodities Traded In India on MCX and NCDEX
- How Commodity Trading Works
- Benefits of Commodity Trading
- Disadvantages Of Commodity Trading
- Commodity Exchanges in India
- The Methods of Commodity Trading
Types of Commodity Trading
More than 100 commodities are traded on 50 major commodity markets worldwide. Traders can trade commodities in four categories:
A few of the most traded commodities around the world are gold, silver, crude oil, Brent oil, natural gas, soybeans, cotton, wheat, corn, and coffee.
Types of Commodities Traded In India on MCX and NCDEX
Here are the commodities Traded on the Multi Commodity Exchange Of India (MCX) and the National Commodity And Derivatives Exchange (NCDEX):
How Commodity Trading Works
Imagine you bought gold futures on MCX for Rs. 72,000 per 100 grams. On MCX, gold's margin is 3.5%. That means you'll pay Rs. 2,520. Let's say the price of gold goes up to Rs. 73,000 per 100 grams the next day. You'll get Rs 1,000 credited to the bank account you linked. Let's say it drops to Rs. 72,500 the next day. In that case, your bank account will be debited with Rs. 500.
With commodity trading, you get more leverage, but you're also taking on more risk because stock market fluctuations are common.
Benefits of Commodity Trading
Commodities trading has multiple benefits, including
Disadvantages Of Commodity Trading
There are a few disadvantages to commodity trading that you should know before investing.
Commodity Exchanges in India
A commodity exchange is a regulated market where you can trade commodities. These are some of the major commodity exchanges in India:
Commodity Exchange | Year of Establishment | Commodities Traded |
---|---|---|
National Multi Commodity Exchange | 2002 | Mustard, rubber, jute, gold, aluminium, copper, etc. |
Multi Commodity Exchange of India | 2003 | Metal, bullion, energy, Pulses, Cereals, petrochemicals, etc |
National Commodity and Derivatives Exchange Ltd | 2003 | Fibres, seeds, oil, steel, copper, etc |
Indian Commodity Exchange | 2009 | Gold, silver, lead, copper, natural gas, soybean, etc |
Universal Commodity Exchange | 2013 | Chana, mustard, soybean, turmeric, etc |
The Methods of Commodity Trading
Several methods are available for trading commodities. Among them are:
Conclusion
Commodity trading involves buying and selling raw materials influenced by government policies and global economic conditions, with various commodity exchanges available. India has three types of commodity contracts: spot, futures, and options. Trading can be done directly or through stocks, ETFs, and mutual funds, offering benefits like diversification and hedging. A Demat account is required, and the BlinkX app provides a hassle-free option for opening a trading account with its user-friendly interface, making it a convenient choice for those looking to engage in commodity trading through an online trading app.