Sharekhan Blog

What is MCX?

  • Jan 31, 2024

Similar to the stock market, commodity market of India also has dedicated exchanges that play an essential role in determining prices and also impact the primary sector of the Indian economy. However, one highly predominant name is the MCX commodity market. So, to know more about it, read on.

Meaning of Multi Commodity Exchange

The Multi Commodity Exchange of India Limited, or MCX, is the country's first exchange dedicated to commodity derivatives. It was established in the year 2003 and regulated by SEBI, it operates similarly to the Bombay Stock Exchange and National Stock Exchange.

The exchange offers natural gas, crude oil, gold, silver, and various types of agricultural products like soybean oil, natural gas, rice, wheat, etc. MCX holds an impressive market share in the nation, around 60% of all commodity futures trades.

What are the Different Commodities Traded on MCX?

It holds around 60% market share in India’s commodity futures trading. Due to this reason, it delivers futures contracts in various categories. Some of them are: -

  • Softs: Coffee and sugar
  • Energy: delivers futures in natural gas and crude oil
  • Metals: copper, nickel, aluminum
  • Currencies: offers trading in Brazilian Real, Mexican Peso, and South African Rand.
  • Agricultural products: gold, cotton, soybean oil, natural gas, rice, etc.

What are the Factors That Affect Commodity Prices on MCX?

Several factors are influenced by commodity prices on MCX. They are: -

1.    Geopolitical factors

Geopolitical events and situations can greatly affect the prices of commodities. When there's political instability in any of the regions that produce a lot of goods, it can mess up how those goods get to us, making prices fluctuate.

Also, problems like trade issues, bans, or limits on certain countries can change how goods move worldwide, making prices go up or down.

2.    Demand and supply

This is another essential variable that greatly affects commodity costs. However, it is true that this rule of demand and supply also applies to the commodity market. Still, it fluctuates with time and wholly depends upon domestic and global factors and seasons.

3.    Cost structures

How much it costs to make something is important in deciding how much it sells. This includes doing research, getting the materials needed, paying workers, dealing with taxes, and all the other expenses that come with running a business. When these costs change a lot, it can directly impact how much things cost to buy. So, whether it's the price of raw materials or how much workers are paid, any ups and downs in these costs can make the prices of things like goods and products go up or down.

4.    Technological Advancements

It plays an essential role in shaping every commodity's price. This means advanced technology improves production efficiency and boosts yields, which will also lower marginal costs. Apart from that, it also increases the supply and reduces the production cost, affecting the overall prices of commodities.

What are the Advantages of MCX?

1.    Diverse Investment Opportunities

The MCX commodity trading delivers a wide range of commodities for trading, like gold and silver, to essential goods like agricultural produce and energy resources. This diversity offers investors ample opportunities to build a varied portfolio, spreading risk and potentially maximizing returns.

2.    Hedging Against Price Volatility

One of the key advantages of MCX is its role in facilitating hedging strategies. Businesses involved in commodity production or consumption can use MCX to protect themselves against price fluctuations. For instance, a farmer can use MCX to hedge against a drop in the price of their crops, ensuring a more stable income.

3.    Price Discovery and Transparency

MCX contributes to transparent price discovery mechanisms. The exchange provides real-time information on commodity prices, helping market participants make informed decisions. This transparency is crucial for fair trading practices, and fosters trust among investors.

4.    Liquidity and Accessibility

MCX is known for its high liquidity, meaning there's generally a good amount of buying and selling activity. This liquidity is attractive to investors as it allows for easy entry and exit from positions. Moreover, the exchange is accessible to a wide range of participants, from individual investors to large institutional players.

5.    Global Impact and Economic Indicators

As a significant player in the commodity market, MCX reflects and influences global economic trends. Monitoring MCX can provide valuable insights into the overall economic health and international market dynamics, making it a useful indicator for investors and policymakers.

The Bottom Line

Trading in commodities is quite a rewarding experience but only delivers fruitful results if done with the right strategy and using a reliable platform like MCX. It provides varied types of contracts that wholly depend upon the kind of commodity being traded in the exchange. For instance, if you are trading for gold, crude oil, or silver, swaps are offered for gold and oil.

Team Sharekhan
by Team Sharekhan

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