A commodity trading account is an account you open with a commodity broker or trading member of a recognized commodity exchange. It is used for buying, selling, and trading commodities. A commodity can be any primary agricultural product or raw material bought or sold. The products can be Metals, Crude oils, wheat, gold, oils, and many more.
Since commodity trading is now easily managed electronically, opening a commodity trading account with a broker is essential to trade in commodities. Majority of the traders in India trade through future contracts in the commodity market. Commodity futures allow you to sell or purchase a commodity at a pre-decided date in the future. At the same time, the option gives you the right but not a commitment to sell or buy any commodity at a pre-decided price in the future.
This is a great avenue to diversify your investments and make good returns. To help you get started, here is all you need to know about commodity trading accounts and commodity trading accounts opening online.
Types of Commodity Trading
As we have already seen, investors can select different commodities for trading or holding. However, these are mainly categorized into four categories, that are:
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Energy - these include essential products like kerosene, coal, gasoline, diesel, petrol, natural gas, etc.
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Meat - livestock, pork, cattle, meat, eggs, milk, and other animal or meat-related products
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Agricultural Products - wheat, lentils, sugar, spices, rice, and other agricultural produce
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Metals - which include gold, platinum, silver, aluminum, copper, and other precious commodities like diamonds, gems, etc.
Which Are the Commodity Exchanges in India?
Similar to the BSE (Bombay Stock Exchange) or the NSE (National Stock Exchange), where you can buy and sell listed stocks, there are four national-level commodity exchanges in India. These are:
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MCX (Multi Commodity Exchange) - Predominantly trades in commodities linked to metal (gold, silver, etc.) and oil
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NCDEX (National Commodity & Derivatives Exchange) - Focused on agri-segment
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MMCE (National Multi Commodity Exchange) - Mainly used for commodities trading in oil seeds, jute, rubber, oils, cardamom, coffee, lentils, and others
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ICEX (Indian Commodity Exchange) - Mainly used for trading in futures for diamond, steel, rubber, and other commodities
Benefits of Commodity Trading Online
Safeguard From Inflation
Commodities are considered a sound barrier against inflation in the near future. These even help in maintaining purchasing power parity.
Diversify Portfolio
A commodity is an excellent option to diversify your investment portfolio, as it's an individual asset class. Diversification is the practice of spreading risk among different assets.
Commodity trading provides investors with exposure to many different types of commodities. Investors can choose to invest in commodities, including oil, gold, silver, and wheat.
Profitable Returns
The huge liquidity of the commodities is riskier in the form of investments. Companies might gain huge profits or incur heavy losses. Thus making reliable investment decisions can make you earn huge profits in the commodity markets.
Higher Potential Returns
Supply and demand fluctuations, market changes, and inflation can affect the prices of individual commodities. However, commodity traders trade futures contracts as well. A contract is a legally binding agreement between two parties to exchange something at a certain time in the future.
Futures contracts allow buyers and sellers to speculate on the future price of a commodity without actually owning the commodity. By speculating on the future price of commodities, commodity traders make money off of changes in prices.
Protection Against Market Fluctuations
During inflation, investors often sell off their stocks and invest in commodities, increasing the commodity's prices. Commodity trading helps reduce volatility in the markets. Volatility occurs when the price of a stock or commodity fluctuates rapidly over short periods. Commodity trading reduces volatility by providing a steady flow of goods and services.
Also, you might need extra funds to buy commodity goods from different places if the value of the rupee drops. Thus you might profit only from commodity goods which will safeguard against market fluctuations and risks.
Transparency in the Process
Commodity trades nowadays are carried out on electronic platforms, which are accessible to everyone at any time. Thus there is a fair price discovery without anyone's involvement and manipulation.
Also, during the trade, the trader's and buyer's identities are kept anonymous, which leads to transparent price discovery.
How to Open a Commodity Trading Account
Opening a commodity trading account with a renowned and reliable broker should be on every trader's list. The process nowadays is easy and quick due to the online presence, even though the trader can open the account offline by visiting the branch.
Below is the process of how to open a commodity trading account in India online:
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Fill up the online form correctly and carefully.
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Submit the required documents required for KYC purposes. Below are the documents required for KYC purposes:
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Identity Proof like Aadhar card, PAN Card, and Driving license.
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Address Proof like Passport, Electricity bill, telephone bill, Voter ID, etc.
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A member-client agreement must be executed between the commodity broker and trader. Here is what is all needed:
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The agreement should be prepared on a Non-judicial paper.
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The outline of terms and conditions should be mentioned, along with the fees breakup in detail by the broker.
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The agreement must be stamped by the competent legal authority and affix a revenue stamp for its validation.
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Submit the required income proofs. These may include:
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A copy of form 16 or income tax return (ITR)
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Bank statement for the last six months
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Statements of your business accounts
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Net worth certificate
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Demat holding certificates/statement
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Share all the details of your Demat account, as your commodity trading account is linked to your Demat account.
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Provide the initial margin deposit cheque, which can further be used for trading. Pay fees of the broker as per his charges.
Once you have filled out the form, submitted all the documents as per law, and paid the account activation fees. The processing time is usually different for the different brokers. Once the documents are processed and the account is activated, you will be provided a trading ID and account details created by the broker.
Now you can log in to your account and create a new password. You can start trading once your account is activated. Make sure you check the initial margin amount in the account, and if you find any discrepancies in it, contact your broker and sort it out.
In Summary
Investing in commodities is an excellent opportunity to diversify your portfolio and make wholesome returns. However, commodity trading is relatively less known than stock markets or mutual funds, as it requires a good understanding of the market and the investor being well-versed with the trading-related information.
Opening a commodity trading account in India with an online broker who can provide market research while providing actionable reports on your trades using simplified dashboards is best. This helps you quickly understand the details of your trade and make informed decisions.
So if you are planning to start trading in commodities, start now and make sure to use the fundamental and technical tools on the platform to help you make an effective trading plan.
FAQs
What is a commodity trading account?
Commodity trading is the process of buying and selling commodities, which is similar to the stock market or any other exchange. Some common commodities traded include gold, crude oil, copper, silver, zinc, natural gas, agricultural produce, and other commodities listed on the commodities exchanges. A commodity trading account is an account you open with a commodity broker or trading member of recognized commodity exchange to perform these commodity trades.
How much money can I make in commodity trading?
Similar to other financial asset exchanges or markets, commodity trades are full of opportunities and risks. There are primarily four types of commodities - energy, meat, agricultural products, and metals. Each commodity type has an associated price, which is reflected in real-time on the commodity exchange. For those who can understand the fluctuations in commodity prices and make the right buy or sell decisions, commodity trading is a great option to generate high profits and long-term investments.
Do I need a separate Demat Account and Commodity Trading Account?
Yes. A commodity trading account is not the same as a DEMAT account. To trade in commodities, you need a separate commodity trading account and a commodity DEMAT account, which enables you to trade in commodity exchanges.
What are the working hours for commodity exchanges?
Commodity trading exchanges work very similarly to a stock market, and all exchanges work between 10 AM - 11:30 PM. Commodity exchanges are closed on bank holidays and weekends.
Are commodity exchanges regulated?
Yes! Every commodity exchange is regulated by the Security and Exchange Board of India (SEBI). Before 2014, this would be regulated by the Forwards market Commission.
Can we trade in commodity trading online?
Yes! Commodity trading has become very straightforward since the advent of the internet and online trading applications. Now you can open a commodity trading account online, and once the account is active, you can make commodity trades without having to contact any broker physically. This makes the entire process more streamlined and safe.