What is Commodity Trading: Overview & Benefits of Investing

Overview and Investment Benefits of Commodity Trading

A commodity is an essential good used in trade and may be exchanged for other items. Items like cereals, gold, livestock, oil, and natural gas are classic examples of commodities. Commodities can be a significant way for investors to diversify their portfolios outside standard investments.

Some investors also turn to commodities during times of market turbulence since the commodity prices often fluctuate contrary to those of equities. Commodities are exchanged on exchanges or the spot market. To be eligible for trading, commodities must adhere to the minimum requirements imposed by the exchanges.

The commodity trading meaning and other essential aspects associated with it have been discussed below:

Market For Commodities

Like any other market, the commodities market is a physical or virtual venue where parties interested in trading commodities (raw or essential items) may do so at a current or future time. The economy's laws of supply and demand determine the price for investments.

Types Of Commodities

Over 100 commodities are traded on roughly fifty leading commodity trading exchanges worldwide.

There are four main kinds of commodities that traders may deal in:

• Metal

Alongside precious metals such as gold, silver, and platinum, a broad range of metals, including those essential in manufacturing and construction such as iron, copper, aluminium, and nickel, are accessible for trade on the market.

• Energy Products

Items used in homes and businesses that use energy are traded in massive amounts. These are oils and natural gas. In addition, other energy commodities are traded for uranium, ethanol, coal, and electricity.

• Agriculture-Related Items

The commodities market sees trading in a broad range of agricultural and animal products. For instance, sugar, cocoa, cotton, spices, cereals, oilseeds, pulses, eggs, feeder cattle, and other products.

• Environmental Goods

This category covers carbon emissions, renewable energy sources, and white accreditations. The most traded commodities on a global scale include soybean, cotton, wheat, maize, natural gas, gold, silver, crude oil, Brent oil, and coffee.

Commodity Trading in India: An Overview

The commodities exchange is the legal institution that determines, controls, and upholds the policies and processes for trading commodities, such as the standardized commodity trading agreements and other associated securities. The trading of different commodities and derivatives takes place in an organized market.

One may trade commodities in India by visiting one of the more than 20 exchanges that make this possible, all of which are regulated by the Securities and Exchange Board of India. The market was governed by the Forward Markets Commission until 2015, when SEBI and it combined to provide a single regulatory framework for commercial investment.

You will need a Demat account, a Trading account, and a Bank account to begin trading in commodities. All your transactions and holdings will be kept in the Demat account, but you will still need to use a reputable stock broker to execute transactions on the exchanges.

There are six significant exchanges for commodity trading in India:

• National Multi Commodity Exchange India (NMCE)
• National Commodity and Derivative Exchange (NCDEX)
• Multi Commodity Exchange of India (MCX)
• Indian Commodity Exchange (ICEX)
• National Stock Exchange (NSE)
• Bombay Stock Exchange (BSE)

Commodity Market Types

Trading in commodities often takes place on spot markets or in derivatives markets. For example, the trading of tangible goods for immediate delivery takes place on "spot markets," which are often referred to as "cash markets" or "physical markets."

In India, there are two different forms of commodity derivatives on the market: futures and forwards. These derivatives contracts utilize the spot market as their underlying asset and provide ownership of it to the owner at a future time for a fixed price. The commodity or item is transferred physically when the deal expires.

The primary distinction between forwards and futures is that the former may be customized and sold over the market, while the latter is standardized and traded on exchanges.

Commodity Trading Investments in India

Traders may discover various strategies to invest in commodities depending on the commodity. There are four main approaches to investing in commodities, keeping in mind that they are physical goods.

• Direct Investing

Direct investing is making purchases of the product directly.

• Futures Contracts

Buying the commodity via futures contracts and making investments in it

• Commodity ETFs

Purchasing ETF shares (Exchange-Traded Funds)

• Commodity Shares

Purchasing stock in firms or organizations that generate commodities

Benefits of Commodity Trading

• Protection

Protection against a stock market collapse, inflation, and other such occurrences increases, and borrowing becomes more costly for businesses, which affects their ability to generate profits. As a consequence, stock prices decline at a time of substantial inflation.

On the other side, if the cost of items rises, the price of essential goods and raw materials would also increase, driving the price of commodities. Therefore, trading in commodities is advantageous when inflation is on the rise.

• High-Leverage Facility

Traders may increase their revenue potential by investing in the commodities market. Paying a 5 to 10% margin enables traders to hold a significant stake in the market. In this method, even a little price increase may dramatically boost profitability.

Even while the minimum margin requirements for different commodities vary, they are still lower than the margins needed for equities investments. Reasonable minimum deposit accounts and regulated full-size contracts are available.

• Diversification

Due to the negative peak correlation between raw materials and equities, commodities help invest in diversify their investments.

• Transparency

The highly regulated commodities market is evolving. By removing any chance of deception, the current computerized trading system has increased the market's transparency and effectiveness. In addition, it allowed for widespread involvement in fair price discovery.

Conclusion

It is essential to understand what is commodity trading and the ideal commodity trading time in India to generate significant revenues through your investments. You may be able to access an entirely new market via commodity trading online. Many people believe that commodity trading is more trustworthy than equities stocks.

However, experienced stock and sector investors believe equities stocks are more profitable and simpler to grasp than commodities. Therefore, your capacity to accept risk rather than your emotions should determine whether you should invest in a commodity.

FAQs

What are commodities?

Commodities are things or products that we utilize on a daily basis, such as metals, food, and energy. Commodities may be freely purchased and sold since they are tradable in nature.

There are four main categories of commodities:

• Metals: copper, platinum, gold, silver, etc.
• Energy: fuels like heating gas, gasoline, and crude oil.
• Agriculture: rice, cocoa, ragi, wheat, etc.
• Livestock and meat: Eggs, cattle, etc.

Even though commodity trading has been in India for a very long time, it has become less popular due to inadequate laws and regulations, disconnected marketplaces, and external incursions.

However, since the launch of a few modern-day exchanges, commodities trading in India is recovering its significance and appeal.

How do you begin trading commodities in India?

You need the following components in order to begin trading commodities in India:

• Accounts for trading and Demat with a reliable broker
• Basic knowledge of the commodity markets

Commodity futures are the most acceptable option to invest in commodities. A contract for the future purchase or sale of a particular commodity at a predetermined price is known as a futures contract. Every commodity listed on the markets has futures available.

To protect against losses caused by significant price changes in essential commodities, commodity trading is usually employed to offset prices. However, since commodities trading is considered risky, only seasoned traders and investors typically try their hands at it.

What time does trading in commodities take place in India? Also, Are Saturdays off for MCX?

In India, the commodities exchanges are open from 9 a.m. to 11.30 p.m. and 11.55 p.m. Five days a week, from Monday to Friday, the Multi-Commodity Exchange is available for trade. However, on some Saturdays, MCX is not operational.

Where does trading in commodities take place in India?

In India, there are several regional and national exchanges that support commodities trading. Still, the Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX) are the two main places where you can start your commodity trading journey.

However, there are still many other popular exchanges that provide options for commodity trading in India. These exchanges include:

• National Multi Commodity Exchange – NMCE
• Indian Commodity Exchange – ICEX
• Ace Derivatives Exchange – ACE
• The Universal Commodity Exchange – UCX

What is the minimum amount that can be invested for commodities in India?

In India, there is no set minimum capital requirement for trading commodities. As a result, several brokers provide substantial leverage on low margins, allowing you to manage significant trade volumes with a little starting capital.