Commodity Market Trading For Beginners & How to Trade in India - Strategy & Meaning

Commodities Market in India: Brief Introduction

Let us first understand what a commodities market is and how it differs from other secondary markets, such as stock exchanges. Commodity trading involves the buying and selling of raw materials or primary agricultural products, such as gold, crude oil, wheat, and natural gas. These are critical economic resources that are traded in standardised contracts or dedicated exchanges.

In India, it offers a wide range of diversification options, in addition to conventional stocks and debt instruments. As international markets have become more interdependent, trading in commodities can be an excellent source of hedging and profit growth.

The commodity market is a physical or virtual marketplace where raw or primary products are bought and sold. These products are categorised into hard commodities (such as gold, silver, crude oil, and metals) and soft commodities (including coffee, wheat, cotton, and sugar).

Commodity Stock Exchanges in India

There are two main commodity exchanges in India:

• MCX (Multi Commodity Exchange) – trades in metals, energy, bullion
• NCDEX (National Commodity and Derivatives Exchange) – focuses on agricultural commodities

How to Trade in the Commodity Market

Trading in the commodities market in India is as straightforward as investing in the stock market. It involves some simple steps, which are mentioned as follows:

1. Select a SEBI-registered broker that offers access to commodity exchanges, such as MCX or NCDEX.

2. Open a trading and demat account specifically enabled for commodity trading.

3. Fund your account with the required margin money to start trading.

4. Select the commodity and contract that align with your interests, market knowledge, and investment goals.

5. Place buy or sell orders through the trading platform based on your strategy.

Basic Strategies for Commodity Trading

Learning and perfecting commodities trading can take months and even years. Spending more time in the market and executing numerous trades helps gain invaluable experience, which enables a trader to grow and improve. Here we have summarized the best strategies which you can use for commodity trading:

Benefits and Risks of Commodities Trading

Let us start by underlining the benefits:

1. It is an excellent hedging tool that protects your business and portfolio against inflation and price volatility.

2. Commodities help in adding diversification beyond equities and bonds.

3. It also helps enhance high liquidity and leverage by providing quick entry and exit options, allowing trading with a smaller capital base.

However, numerous risks are associated with commodities trading, including high volatility, leverage, and the inherently speculative nature of trades. This is why it is important to approach this market with caution.

FAQs

What is the commodity market?

A commodity market is a marketplace, whether physical or virtual, where raw materials (such as metals, energy, and agricultural products) are bought and sold through spot and derivative contracts, allowing participants to hedge risk or speculate.

What are commodity futures in India?

Commodity futures are standardised exchange-traded contracts that obligate a buyer or seller to transact a specified quantity of a commodity at a predetermined price on a future date.

How do beginners start trading commodities?

Beginners start by selecting a commodity exchange (like MCX or NCDEX), opening a SEBI-approved trading account with a broker, funding it with the necessary margin, and placing trades based on market analysis.

What are the major categories of commodities traded in India?

In India, commodities traded are broadly categorised into metals (e.g., gold, silver), energy (crude oil, natural gas), agriculture (wheat, cotton), and livestock.

5. What are the key risks and benefits of commodity trading? Commodity trading offers benefits such as portfolio diversification, inflation hedging, and liquidity, but it also carries risks, including high price volatility and leverage-induced losses.