All About Commodity Trading Market in India

Commodity Trading on NCDEX

What is a Commodity Trading Market? 

A commodity trading market is a marketplace where you can buy, sell and trade in commodities. The commodity trading market can be both physical and virtual (stock exchange). 

There are 4 types of commodities which can be traded in a commodity trading market: 

  • Metals – Gold, Silver, Platinum, Copper etc.
  • Energy – Crude oil, Gasoline, Heating gas etc.
  • Agriculture – Wheat, Rice, Cocoa, Ragi etc.
  • Livestock & Meat – Eggs, Cattle etc.

Where does commodity trading take place in India? 

There are 4 major commodity trading exchanges in India: 

  • Multi Commodity Exchange of India, MCX
  • National Commodities and Derivatives Exchange Limited, NCDEX
  • Indian Commodity Exchange, ICEX
  • National Multi Commodity Exchange of India, NMCX

Commodity Trading Markets in India

The commodity trading market in India is an electronic trading platform for market participants to buy and sell commodities.  The two main commodity trading markets in India: 

  • Multi Commodity Exchange of India, MCX
  • National Commodities and Derivatives Exchange Limited, NCDEX

Both MCX and NCDEX are online commodity exchanges which help market participants to trade in precious metals, agricultural products and energy products. 

Types of commodities traded in India on MCX

  • Bullion like Gold, Silver, Platinum 
  • Energy like natural gas, crude oil, gasoline
  • Agricultural products like castor seeds, cardamom, black pepper, cotton. 
  • Metals like lead, zinc, copper, nickel 

While, MCX is the largest commodity trading market in India, since 2003, NCDEX has started picking up pace and is currently the largest commodity trading market in India in terms of volume. 

But commodity trading is not new in India. The commodity trading market in India has a rich history which dates back to 1875 with the establishment of Bombay Cotton Trade Association. 

But a world war, fight for independence and poor government strategy, resulted in stagnant growth of the commodity trading market in India. 

[Suggested Reading: What is Commodity Trading?]

But with the establishment of NCDEX, one of the leading commodity exchanges in India, commodity trading has started picking up pace. 

NCDEX is a leading agricultural commodity exchange in India with an average daily turnover of Rs 1,18,163.78 Lakhs in 2020, much higher than the Rs 11,318.05 Lakhs in 2003. 

In this article, we will discuss India’s leading commodity exchange platform – NCDEX. 

What is the full form of NCDEX? 

The full form of NCDEX is National Commodity & Derivatives Exchange Limited. NCDEX was incorporated as a public limited company on 23rd April 2003 and began operations on 9th May 2003. 

NCDEX was recognised as a deemed stock exchange on 28th September 2015 under the Securities Contracts (Regulation Act), 1956. 

NCDEX is regulated by SEBI and is headquartered in Mumbai. NCDEX allows trading in 23 commodities; highest across the global commodities market. 

What is traded on the NCDEX? 

The NCDEX allows trading in 23 commodities, highest among all commodity trading markets. 

  • Cereal & Pulses: Chana, Barley, Bajra, Wheat, Moong, Maize, Paddy(Basmati). 
  • Fibres: Kapas, 29mm Cotton 
  • Spices: Turmeric, Coriander, Jeera
  • Oil & Oil Seeds: Castor oil, cotton seed oil cake, soybean, refined soy oil, mustard seed, crude palm oil, sesame seeds 
  • Soft: Gur 
  • Guar complex: Guar seed (10 MT), Guar gum refined splits. 
  • Index products: AGRIDEX

Similar to NSE’s Nifty50 and BSE’s SENSEX, even NCDEX has a benchmark index known as NCDEX AGRIDEX. 

While SENSEX tracks the performance of top 30 stocks, NCDEX AGRIDEX tracks the performance of 10 most liquid commodities on the NCDEX platform like Chana, Gaur Seeds, Soybean etc. 

Apart from commodities, NCDEX also NCDEX rain index and NCDEX monsoon index tracking Indian monsoon between 1st June – 30th September every year

Who are the participants in commodity markets in India? 

Like the stock market, the commodity trading market is also dominated by: 

  • Hedgers
  • Speculators

1. Hegders: Hedgers are producers, manufacturers, etc who participate in the commodity trading market only to hedge their risk. Their aim is to reduce risk, not make profits. 

For example: A rice farmer wants to hedge the price risk on his produce. So, he enters into a futures contract. Now, if the price of rice falls in the local market, he can sell his futures contract and make profit. In case the price rises, he can sell the produce at a higher price in the local market. 

This way farmers, manufacturers hedge their risk in the commodity markets. 

2. Speculators: Speculators are traders who simply speculate on the price of the commodity. Speculators aim to generate short term profits through commodity trading. They do not face any risk, which needs hedging. For example, Ravi expects that the price of rice will go up in the coming months. So, he buys a rice futures contract and sells when the price increases. This way, he makes a profit without taking any long term positions or physical delivery. 

Why should you trade in commodity markets in India? 

Commodities markets are the perfect way for you to hedge your equity portfolio. Commodities and equities have a negative correlation. So, when equity markets fall, commodity markets rise and vice-a-versa. 

Hence commodity trading helps you manage the stock market risks. Certain commodities like crude oil, gold, copper offer high trading volumes. 

If you do not want to directly trade in the commodities market, then you can also invest through mutual funds. 

How can you invest in the Commodity market in India? 

There are 5 ways of investing in commodity markets in India: 

  • Investing in commodity ETFs
  • Investing in commodity mutual funds
  • Investing in commodity options
  • Investing in commodity futures
  • Investing in physical commodity

1. Investing in commodity ETFs: A commodity exchange traded fund is a fund that can either invest in a single commodity or in a collection of commodities. Commodity ETFs can be traded on the stock exchange. Examples of commodity ETF include HDFC Gold ETF, Nippon India Gold ETF Bees etc. 

2. Investing in commodity mutual funds: Commodity mutual funds invest in various commodities. They are professionally managed by experts. Mutual funds like HDFC Gold Fund, Kotak Gold Fund are examples of commodity mutual funds in India. 

3. Investing in commodity options: Commodity options gives traders the right but not the obligation to buy or sell commodities at a predetermined rate and date. While trading in commodity options, the trader can decide to not exercise his right. 

MCX offers options contracts in gold, silver, copper, zinc and crude oil.

NCDEX offers options contracts in guarseed, soya bean, refined soya oil, chana etc. 

4. Investing in commodity Futures: Commodity futures are mostly used by producers and manufacturers to hedge their price risk. Speculators also trade in the commodity futures market as it offers high liquidity and leverage. 

5. Investing in physical commodities: Typically speculators do not invest in physical commodities as it has a huge storage, insurance costs which reduces the overall return. 

What is the importance of a commodity trading market? 

Commodity trading market has provided an exchange platform for market participants where real price discovery of commodities can take place. Let’s look at the importance of commodity trading markets in India. 

1. Real Price Discovery: Commodity trading markets have provided a transparent platform to farmers. This has helped in easy and real price discovery in the market. Prior to commodity trading markets, farmers were often easily looted by corrupt middlemen who used to buy from farmers cheaply and sell at a high price to traders. But with a centralised commodity trading exchange, the farmer’s interests are protected. 

2. Better Quality of Commodities: Since commodity trading markets have strict rules on the quality of commodities traded on the exchange, the farmers are also paying special attention to growing top-notch commodities. 

3. Better Price Risk Management: With commodity derivatives, farmers have various efficient price risk mitigation tools like futures and options. 

4. Ease of Information: A central commodity trading market has helped farmers get access to information through free SMS, dedicated TV show ‘mandi.com’, and awareness and training programs throughout the country. 

To start trading in the commodities market in India, open a Samco commodity trading account today and get access to the best tools and infrastructure for creating wealth in the Indian commodities market. 

Share this article

About The Author

Leave A Comment?