Irrespective of whether you are a finance expert or not, buying and selling commodities is something all of us have done. In its simplest form, commodities refer to goods or raw materials that can be bought and sold. Some examples of commodities are essential goods such as grains, oil, and natural gas. More expensive goods like gold and silver are also considered commodities.
Selling and buying goods is the foundation of any economy, regardless of size. An extension of this concept is commodity trading. It refers to investing in commodities to diversify one’s portfolio and improve returns.
How does commodity trading work?
Commodity trading in India (and globally) is facilitated through the commodities market or commodities exchange. Like the stock market, where shares are bought and sold, the commodities exchange/market allows for the buying and selling of commodity goods. It is a legal body that decides the framework of commodity trade and associated investments by providing all required regulations and procedures.
Commodity trade mainly takes place on the derivative market and the cash market. Cash markets or spot markets involve the immediate sale and delivery of goods at spot prices. On the other hand, derivative markets include futures contracts and forwards contracts. They involve two parties choosing to trade a particular commodity at a predetermined price in the future.
Commodity trading in India
Commodity trading in India involves four major categories – energy, metals, bullion, and agricultural goods.
Energy involves entities such as crude oil and natural gas, while precious metals such as gold and silver fall under the bullion category. In the agriculture group, goods such as paddy, wheat, pepper, sugar, and cotton are included. The fourth category of metals contains commodities such as copper and zinc.
These commodities are classified into hard commodities, such as crude oil and gold, and soft commodities like agricultural products and livestock.
Commodity trading in India happens on major exchanges in India such as the Multi Commodity Exchange of India (MCX), Indian Commodity Exchange (ICEX), National Commodity and Derivative Exchange (NCDEX), National Stock Exchange (NSE), and Bombay Stock Exchange (BSE).
How to begin commodity trading?
The first step in commodity trading in India is setting up a Demat account. The Demat account – linked to a trading and bank account – is the basket that holds your investments. To begin a Demat account, you need a brokerage. If you are a first-time investor, select a brokerage that will provide research-backed trading advice and cater to your financial goals while creating your commodity trading portfolio. Make sure that the broker is registered by the Securities and Exchange Board of India.
To make your commodity trading experience hassle-free, use Paytm Money. Sign up and begin trading in a few simple steps.
After creating the Demat account, you will have to pay an initial sum. This amount is based on the commodity you are trading. This initial margin is usually 5%-10% of the commodity’s contract value.
Next, you must create a trading plan to traverse the market. The plan must match your risk tolerance and financial goals.
In India, the commodity trading time starts at 09:00 A.M. and ends at 11:30 P.M, from Monday to Friday. Saturday and Sunday are holidays.
Commodity trading offers investors the opportunity to diversify their portfolios. They also protect against inflation and the impact of supply chain disruptions. Commodity prices tend to increase during inflation, natural calamities, and geopolitical crises. So if planned well, commodity trading can return profits in such times. It also allows investors to understand the accurate price of commodities in a regulated market, thereby avoiding losses and mitigating risks.