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What is Commodity trading?
While there are generally 2 types, hard and soft, commodities refer to naturally occurring raw materials or resources that are standardised, have intrinsic worth and are typically utilised to make refined goods. Examples of tradeable commodities include crude oil, natural gas, gold, silver, copper, zinc, nickel, rice and wheat.
While soft commodities (rice and wheat) are mostly utilised for initial consumption, hard commodities (crude oil, gold, silver and so on) are frequently employed as ingredients to create other products and deliver services.
In daily life, these goods are traded, frequently in large quantities. These items' prices are fluctuating due to the ongoing effects of supply and demand on their prices. Commodity trading seeks to magnify these price swings so that traders may profit from these price variations. Commodity trading works just like Derivatives (F&O) trading.
You can trade in commodities directly in India, as well as through the trading of Commodity Futures and Options, the latter being of interest to market participants. To get started, you need to have a Demat account with the Commodity segment activated. Click here to see the simple 4-step journey to open an account and activate the segment on Sharekhan platforms. There are several commodity exchanges in the country that mediate Commodity trading.
Trading in Commodity market
Let’s understand Commodity trading with an example:
Let’s presume Mr. Vishwas bought a Gold Mini contract on MCX at Rs 50,000 for every 100 gm. Don’t worry, he doesn’t have to pay the entire contract value! Say Gold’s margin was 9.5% on the MCX exchange (calculate margins on the Sharekhan Margin Calculator. Therefore, Vishwas will be paying Rs 47,500 for his Gold Mini contract.
Say Gold price is undergoing fluctuations; let’s take 2 scenarios:
- The next day the cost of Gold increases to Rs 51,000 per 100 gm. In this scenario, Rs 10,000 will be credited to the margin amount with his broker.
- The next day the cost of Gold drops to Rs 49,500. In this case, Rs 5,000 will be debited from his margin amount.
Commodity derivatives trading involves trading of standardised derivatives (Futures and Options) contracts of agricultural and non-agricultural commodities on the electronic platform of recognised stock exchanges, subject to approval of SEBI and extant regulations and laws governing the Commodity derivatives market. A derivatives contract entails the right to exchange a commodity at a later date for a specified price.
As we’ve seen earlier, a trader is not required to pay the full cost of the commodity when buying a Commodity futures contract. Instead, customers can pay a cost margin, which is a set portion of the initial market price. Lower margins allow one to purchase a futures contract for a significant quantity of a precious metal, such as gold, for a small percentage of the initial cost.
Participants of the Commodity market
The Commodity market is driven by speculators and hedgers, just as the Derivatives (F&O) market.
Speculators
Speculators attempt to predict the price movements of commodities and trade according to their money-making strategies. They spend time and effort to analyse the prices of commodities before placing trades. For instance, if they believe that prices will rise, they will acquire Commodities Futures Contracts. When prices do appear to rise, they can then sell the aforementioned contracts for more money than they paid for them. Similarly, if their analysis points to a decline in prices, they sell the contracts and then buy them back at a cheaper cost, generating a profit (called “shorting”).
Hedgers
Manufacturers and producers use the Commodities Futures market to hedge their risks. Farmers would lose money, for instance, if prices changed and fell during the harvest. Farmers can sign a Futures Contract to reduce the chances of loss in case prices do fall. Farmers can make money on the Commodities Futures market to offset their losses if local market prices drop. On the other hand, gains made in the local market can make up for losses experienced in the Futures market.
Benefits of opening a Commodity trading account
Online trading in Commodities offers several advantages to traders:
100% digital
Trading online is simple and can be done from any Internet-capable device, such as a laptop or a smartphone.
High liquidity
Due to the commodity market's high level of liquidity, it is simple to acquire and sell assets when necessary.
Highly leveraged
As we saw earlier, commodities are highly leveraged, and you don’t need to shell out much capital to take advantage of market fluctuations. Even a small price increase can enormously boost profit potential.
Diversification
Given the low correlation between commodities and equity stocks, commodities allow investors to diversify their portfolio.
Protection against inflation
During periods of high inflation, stock prices decline. However, with inflation, the price of commodities increases. Therefore, trading in commodities is advantageous when inflation is on the rise.
Transparency
In India, the Commodity market is tightly controlled by the exchanges and the regulator and is highly transparent.
How to open Commodity trading account?
At Sharekhan, it takes just 3 steps to open an equity trading account (also known as a Demat account). And once you have a Demat account, activating the Commodities segment is seamless and easy. Let’s see the steps:
STEP 1
Fill in your basic personal details
STEP 2
Upload a few KYC documents (like PAN, Aadhaar, cancelled cheque) that are SEBI-mandated to open a Demat & Trading account
STEP 3
The Demat & Trading account is activated post verification
STEP 4
To activate Commodities, Proof of Income is to be submitted, which can be done 100% online via the Sharekhan app or website
Why invest in Commodity trading through Sharekhan
We know the opportunities that Commodities present, and we’ve built an F&O ecosystem that delivers for you.
We keep it simple and full-service. We give you powerful trading platforms. We give you FREE recommendations and strategies backed by Research. And we give you the human support and teacher-led Learning Modules you need to take you places.
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Commodity trading FAQs
Which are the major data / economic indicators of international markets for commodity markets?
Some of the major economic data are:
- Employment data
- GDP data
- Non-Farm payroll data
- PPI (Production Price Index)
- FOMC meeting (Federal Open Market Committee)
- Crude Oil inventory
- Natural Gas inventory
- LME inventory (London Metal Exchange)
What are the benefits of Commodity Options?
Commodity Options are useful risk-management tools, particularly for small stakeholders, as the Option buyer does not generally have to maintain margins. They are akin to price insurance for hedgers, which can be bought by paying only a one-time option premium.
An option is a derivative contract that gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying. For owning this right, the option holder pays a price (called option premium) to the seller of this right. The seller (writer) of option, on the other hand, bears the obligation to honour the contract should the buyer choose to exercise the option.
MCX offers options on commodity futures contracts traded on the exchange. These commodity options, on exercise, devolve into the underlying futures contracts. All such devolved futures positions open at the strike price of exercised options.
What are the different factors that affect commodities markets in India?
- USDINR fluctuation (Forex market fluctuations and Currency market fluctuations)
- Supply and Demand factors
- Economic indicators and factors
- Storage levels and transportation constraints
- Geopolitical factors
- Seasonal factors – extreme weather changes affect commodity prices
Who regulates the commodity derivatives market in India?
The Securities and Exchange Board of India (SEBI) regulates the commodity derivatives market in India since September 28, 2015. Before September 28, 2015, the Commodity derivatives market was regulated by erstwhile Forward Markets Commission (FMC).
Which are the major Exchanges in India for Commodities?
India has 6 major Commodity trading exchanges, namely:
- 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)
Which are the different product segments available in MCX?
Bullion
Gold, Gold Mini, Gold Guinea, Gold Petal, Silver, Silver Mini, Silver Micro
Base Metals
Aluminium, Copper, Lead, Nickel, Zinc
Energy
Crude Oil, Natural Gas
Agriculture
Crude Palm Oil (CPO), Kapas, Mentha Oil, Rubber
The following table illustrates the lot size, price quotation unit and, interestingly, the profit/loss you will make on your trade if your contract value moves by a single Rupee:
|
Commodity |
Lot size |
Price Quotation |
1 Rs Move Profit/Loss |
|
Gold |
1 kg |
10 gm |
100 |
|
Gold Mini |
100 gm |
10 gm |
10 |
|
Silver |
30 kg |
1 kg |
30 |
|
Silver Mini |
5 kg |
1 kg |
5 |
|
Silver Micro |
1 kg |
1 kg |
1 |
|
Crude |
100 barrels |
1 barrel |
100 |
|
Oil |
100 barrels |
1 barrel | 100 |
|
Natural Gas |
1250 mmbtu |
1 mmBtu |
1250 |
|
Copper |
2.5 MT |
1 kg |
2500 |
|
Aluminium |
5 MT |
1 kg |
5000 |
|
Lead |
5 MT |
1 kg |
5000 |
|
Zinc |
5 MT |
1 kg |
5000 |
Which types of orders are available in MCX in Commodities?
The best five buy and sell orders for every contract available for trading are visible to the market and orders are matched based on price time priority logic. Orders can be placed with time conditions and/or price conditions.
Day Order
A Day Order is valid for the day on which it is entered. If the order is not matched during the day, the order gets cancelled automatically at the end of the trading day.
GTC
A Good Till Cancelled (GTC) order is an order that remains in the system until the expiry of the respective contract in which it is entered or until when the same is cancelled by the member.
GTD
A Good Till Date (GTD) order is valid till the date specified by the member. After the specified date, the unexecuted orders get automatically cancelled by the system.
IOC
An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as the same is placed in the market, failing which the order will get cancelled immediately.
Limit Order
The order wherein the price is to be specified while placing the same.
Market Order
The order at the best available price at the time of placing the same.
Which are the different participants in Commodity markets in India?
The below segments of people generally invest and trade in the Commodities markets in India:
- Farmers
- Exporters
- Importers
- Hedgers
- Traders
- Jobbers
- Arbitragers
Traders, Jobbers and Arbitrager generally provide liquidity in the Commodity market.
Which International Exchanges are important for the Commodities segment?
CME Group Inc. (Chicago Mercantile Exchange) is an American global markets company. It is the world's largest financial derivatives exchange, and trades in asset classes that include agricultural products, currencies, energy, interest rates, metals, stock indexes and cryptocurrencies futures.
NYMEX (New York Mercantile Exchange) is a commodity futures exchange owned and operated by CME Group of Chicago.
The Chicago Board of Trade (CBOT), established on April 3, 1848, is one of the world's oldest futures and options exchanges. On July 12, 2007, the CBOT merged with the Chicago Mercantile Exchange (CME) to form CME Group. CBOT and three other exchanges (CME, NYMEX, and COMEX) now operate as designated contract markets (DCM) of the CME Group.
The London Metal Exchange (LME) is a futures and forwards exchange with the world's largest market in standarised forward contracts, futures contracts and options on base metals. The exchange also offers contracts on ferrous metals and precious metals. The company also allows for cash trading. It offers hedging, worldwide reference pricing and the option of physical delivery to settle contracts.
The Shanghai Metal Exchange (SHME) was established on 28 May, 1992. SHME is a non-profit, self-regulating corporation. The exchange was created for trading in non-ferrous metals and currently contracts for several non-ferrous metals, including copper, aluminium, lead, zinc, tin, nickel. SHME is located in the city of Shanghai and its geographical location bridges the time gap between London Metal Exchange and New York Mercantile Exchange markets, thus enabling traders across the world to have a 24-hour access to futures contracts of non-ferrous metals.
Are Index Futures available in MCX exchange in the Commodities segment?
Currently, there are 3 Index Futures available in MCX
- MCX iCOMDEX Bullion: MCX iCOMDEX Bullion Index (Symbol: MCXBULLDEX) is part of MCX iCOMDEX family of Excess Return (ER) indices, whose constituents are near month futures contracts of Gold and Silver traded on MCX. Being ER index, it also provides the return attributed to rolling of constituent contracts to a new expiry, apart from price returns. It has a base value of 10,000 as on December 31, 2015.
Trading Unit (1 Lot) Rs 50 * MCX iCOMDEX Bullion Index.
Settlement Mechanism: The contract would be settled in cash. - MCX iCOMDEX Base Metal Index (Symbol: MCXMETLDEX) is part of MCX iCOMDEX family of Excess Return (ER) indices, whose constituents are near month futures contracts of Aluminium, Copper, Lead, Nickel and Zinc, traded on MCX. Being ER index, it also provides the return attributed to rolling of constituent contracts to a new expiry, apart from price returns. It has a base value of 10,000 as on December 31, 2015.
Trading Unit (1 Lot) Rs 50 * MCX iCOMDEX Base Metal Index.
Settlement Mechanism: The contract would be settled in cash. - MCX iCOMDEX Energy Index (Symbol: MCXENRGDEX) is part of MCX iCOMDEX family of Excess Return (ER) indices, whose constituents are near month futures contracts of Crude Oil and Natural Gas traded on MCX. Being ER index, it also provides the return attributed to rolling of constituent contracts to a new expiry, apart from price returns. It has a base value of 10,000 as on December 31, 2015.
Trading Unit (1 Lot) Rs 125 * iCOMDEX Energy Index.
Settlement Mechanism: The contract would be settled in cash.
Note that all 3 Indexes are rebalanced in the month of January every year. The detailed methodology and data are available on the MCX website.
What are the commodity trading hours in India?
Commodities are a different asset class from stocks and bonds in the investment world. Trade in commodities takes place on certain exchanges. The commodity market operates for longer hours and differs from the equity market.to see the list of trading and clearing holidays.
The market for Commodity Derivatives is open every week from Monday to Friday. The trading window is extended due to different time zones and to coincide with the opening of the global commodity market. Typically, the Commodity trading timings are 9 am to 11:55 pm.
Is commodity trading in India profitable?
If you are aware of the factors that influence commodity prices, commodities trading can be profitable for you. Don’t expect overnight positive returns, though. Having a trading strategy that works for you is crucial. Copying other traders’ strategy is rarely successful.
Which commodities are best for trading in India?
Although there is an extensive list of commodities traded in our country, here are the ones that are frequently traded:
- Crude Oil
- Natural Gas
- Gold
- Silver
- Copper
- Zinc
- Aluminum
How do I start trading in commodities?
Trading in commodities entails purchasing and selling commodities in response to price fluctuations. Let’s see how you can start trading in commodities. The first step is to understand the fundamentals of the Commodity trading market before you start investing. Then select an efficient broker, which will carry out all the trading on your behalf. We suggest you choose a full-service broker like Sharekhan. We offer Research-based trading suggestions for the Commodity segment, so if you are a novice trader you can make well-informed choices. After this, make sure you have a trading strategy in place. Then comes the initial deposit. Typically, 10% of the contract value is more than enough to begin trading in commodities.
What is a Commodity trading account?
In India, you can trade in Commodity Futures and Options in the market. To get started, you need to have a Commodity trading account. Click here to see the simple 3-step segment activation process on Sharekhan platforms. There are several commodity exchanges in the country that mediate Commodity trading.