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Must Know Basics of Commodity Markets & Commodity Trading in India

Author Deepika Khude | Posted September 30, 2021

In 2021, India exported goods and services worth $299.30 Billion US Dollars! A large chunk of this comes from exporting commodities like rice, wheat, pulses etc. In fact, organised buying and selling of commodities or commodity markets originated in India in 1875 with the establishment of Bombay Cotton Trade Association.

[Read More: History of Commodity Trading in India]

With such a rich history, commodity trading and India’s commodity market is one of the most lucrative wealth creation avenues. But before you start commodity trading in India, you first need to learn its basics.

Today, we are going to understand what is commodity trading and how to trade in the Indian commodity markets. Let’s break this term up and begin with understanding what is a commodity.

What is a Commodity?

A commodity includes all the goods which we use in our day-to-day lives. It can be food, energy, metals, etc. The four major types of commodities are –

  • Agriculture – Ragi, Rice, Wheat, Cocoa, Soyabean etc.
  • Precious Metals – Platinum, Gold, Silver etc.
  • Base Metals – Copper, Aluminium, Nickel etc.
  • Energy – Crude Oil, Gasoline, Heating gas etc.

What is Trading?

Trading means exchanging one item for another. It is a basic economic concept which involves buying and selling of goods and services in exchange for cash. In the stock market, trading refers to buying and selling shares.

What is Commodity Trading in India?

Commodity trading dates back to 4,500-4,000 BC. It was introduced in the form of barter trade where goods were exchanged for goods. Cash was not in the picture yet. Over a period of time, items like clay tokens, seashells, and coins came into play as a medium of trade. Even today, farmers in villages exchange commodities among themselves.

However, today commodity trading is much more organised and streamlined. Just like stocks are traded on exchanges like NSE and BSE, commodity trading happens on commodities exchange.

Commodities are split into two types –

  1. Hard commodities (includes natural resources that must be mined or extracted like gold)
  2. Soft commodities (includes mainly agricultural products)

There are six commodity exchanges in India –

  1. Multi Commodity Exchange (MCX)
  2. Ace Derivatives Exchange (ACE)
  3. The Universal Commodity Exchange (UCX)
  4. National Multi Commodity Exchange (NMCE)
  5. Indian Commodity Exchange (ICEX)
  6. National Commodity and Derivatives Exchange (NCDEX)

The complete list of commodities traded on MCX can be found here.  The MCX market  is open from 9 AM till 11.30 PM or 11.55 PM.

The Securities and Exchange Board of India (SEBI) regulates commodity trading in India. While the Commodity Derivatives Market Regulation Department (CDMRD) looks after its day-to-day operations. Recently, SEBI allowed mutual funds and PMSes to trade in the commodities derivatives segment.

Commodity exchange in India trades from Monday to Friday.

  • The trade timings are IST 9:00 A.M. to 05:00 P.M. for agricultural commodities.
  • For non-agricultural commodities like metals, crude oil, etc., the trade timing is IST 10:00 A.M. to 11:55 P.M.

Commodity Market Trading v/s Stock Market Trading

Stocks denote company ownership and trade on stock exchanges like National Stock Exchange (NSE). Whereas commodities represent goods that are used in our everyday life. Commodities trade on commodity market exchanges like the Multi Commodity Exchange (MCX). Both these asset classes come with profit-making potential. But, both of them trade at different marketplaces.

Here is a quick reference table to major out the differences between the commodity market and the stock market.

Characteristics Commodity Trading Equity Trading
Nature of Product Commodities are products that are consumed in day-to-day life. Stocks or equities represent ownership in a company.
Purpose To hedge against adverse price movements of underlying commodities. To build long-term wealth through capital appreciation and dividend income.
Ownership When a commodity trading contract is settled physically, the buyer takes physical delivery of the commodity. But commodity trading contracts can also be cash-settled. When you buy shares, you are buying ownership in a company.
Duration Commodities are traded for shorter duration. Shares can be held and passed on through generations as long as the company is listed on the exchange.
Margin Commodities are traded on margins and high leverage. Traditionally, you cannot buy stocks with only margin money. However, Samco Securities allows trading stocks on margin.
Volatility Commodities are highly volatile. Compared to commodities, equity trading is less volatile.
Trading Hours Commodity trading on MCX takes place between 9 am and 11.30 pm to 11.55 pm. Stocks are traded in a limited time frame between 9.15 am to 3.30 pm.

[Read More: Commodity Trading Vs Equity Trading]

Spot Commodity Markets and Futures Commodity Markets

In India, there are 2 major commodity exchanges – MCX and NCDEX. They facilitate trades on a spot and futures basis in agro, base and precious metals as well as fossil energy sources.

Commodities trade on spot as well as in the futures markets. In the spot market, the demand and supply dynamics determine the prices of the commodities. The trade is settled in cash against immediate delivery. It is more prevalent in the retail market.

But with the introduction of the futures market, commodity trading is just like trading in equity futures. With commodity futures, the transaction is completed at a future date. Here, the physical delivery is rarely taken. Hence speculators prefer these types of trades where they only have to participate in the profit or loss. The buyers and sellers trade a commodity based on a standardized contract considering the future price.

Advantages and Disadvantage of Commodity Futures –

The advantage of trading commodities in the futures market is that they are highly leveraged investments. Thus, an investor can take big bets with a relatively small amount of money. The commodity futures market is also very liquid. This makes it easier for an investor to enter and exit the market.

The disadvantages of trading in commodity futures is that the markets are volatile. This means the risk is higher. High leverage can also magnify the profits and losses. This means, you can win big or lose big.

[Read More: Advantages and Disadvantages of Commodity Trading]

How to Invest in Commodities?

Commodity trading isn’t the only means of investing in commodities. You can also invest in stocks of companies that produce commodities. Or you could invest in exchange-traded funds (ETFs) or mutual funds that track these commodities. Here are five basic ways to invest in commodities.

How to Invest in Commodities1. Physical Commodity: Investors can buy actual physical commodities like gold and other precious metals and sell it at a profit in the future. But the biggest issue with physical commodity trading is the high logistics cost and expensive insurance which eats into the returns generated by the asset.

2. Commodity ETFs: Commodity exchange traded funds are passively managed and invest in physical commodity and futures contracts which are traded on the exchange on real-time basis. They help investors benefit from price appreciation of the commodities without the hassle and liquidity issues of physical commodity trading.

  • List the Commodity ETFs traded in India
Axis Gold Exchange Traded Fund
Aditya Birla Sun Life Gold Exchange Traded Fund
HDFC Gold Exchange Traded Fund
ICICI Prudential Gold Exchange Traded Fund
IDBI Gold Exchange Traded Fund
Invesco India Gold Exchange Traded Fund
Kotak Gold Exchange Traded Fund
Nippon India Gold BeES Exchange Traded Fund
Quantum Gold Exchange Traded Fund
SBI Gold Exchange Traded Fund
UTI Gold Exchange Traded Fund

3. Commodity Mutual Funds: These are actively managed mutual funds which in turn invest in commodity ETFs. They offer the benefit of diversification and issues of liquidity in commodity ETFs are eliminated with commodity mutual funds. Since lakhs of investors invest collectively in commodity mutual funds, economies of scale are also achieved.

  • List the commodity mutual funds in India
Commodity Mutual Funds AUM

(In Crores)

Expense Ratio 1-Year 3-Years 5-Years
Kotak Gold Fund 1,019.10 0.56% -8.21% 14.31% 7.30%
Axis Gold Fund 245.86 0.61% -7.43% 14.01% 6.62%
SBI Gold Fund 1,145.55 0.52% -7.89% 13.96% 6.91%
HDFC Gold Fund 1,229.04 0.50% -8.26% 13.64% 6.81%
Invesco India Gold Fund 48.89 0.45% -8.20% 12.82% 6.82%
Aditya Birla Sun Life Gold Fund    239.84 0.50% -7.43% 13.43% 6.68%
Nippon India Gold Savings Fund 1,390.83 0.35% -8.12% 13.46% 6.65%
ICICI Prudential Regular Gold Savings Fund (FOF) 547.60 0.53% -7.67% 13.25% 6.74%
Quantum Gold Savings Fund 67.56 0.21% -8.16% 13.50% 6.94%

4. Commodity Options: Investors can also take exposure to commodities using commodity options contracts. In a commodity options contract, the buyer has the right but not the obligation to buy or sell the underlying commodity in the future at a particular strike price. Commodity options are better than futures contract as the buyer has no obligation to compulsorily buy or sell the underlying asset.

  • MCX offers commodity options contracts in Gold, Silver, Crude Oil and Zinc.
  • NCDEX offers commodity options contracts in Soya bean, soya refined oil, guar seed, guar gum, Chana etc.

5. Commodity Futures: This is a contract between two parties to buy and sell the underlying commodity at a fixed price and date in the future. Irrespective of the price on the settlement, both parties have to honour their futures contract. Commodity futures contract are available on Petroleum, Gold, Silver, Natural Gas, Wheat, Cotton etc. They are generally used by commodity producers to hedge against adverse price movements.

Watch this video to understand how you can kick start commodity trading in India.

Commodity (Futures and Options) Trading in India

If one desires to trade commodity futures and options in India, then you must open an account with a commodity broker. Some important factors to consider for online commodity trading in India are –

1. Settlement of Commodity Derivatives/Futures Contracts

Equity derivatives are only cash-settled in India. But commodity derivatives can be settled either in cash or physical delivery. However, due to the great hardship involved in the physical delivery process, most commodity derivatives contracts in India are cash-settled.

2. Margins for trading commodities

Three kinds of margins are applicable while trading commodities in India on the MCX –

  • Commodity SPAN Margin

The commodity SPAN margin is the initial margin applicable for initiating trades on the commodity exchanges. Check the commodity SPAN margin requirement on the SAMCO commodity SPAN Calculator.

  • Commodity Exposure Margin

The commodity exposure margin is the additional margin applicable for initiating trades over and above the SPAN margin on the commodity exchanges.

  • Additional Extreme Loss Margin or ELM Margin

With Effect from 2016, an additional 1% ELM margin is also applicable on all commodities traded on the total value of the contract.

Brokerage in Online Commodity Trading

One of the biggest costs of commodity trading is brokerage. In commodity trading, brokerage is charged on the basis of turnover. Traditional brokers quote brokerages on a percentage basis or brokerage per crore of turnover.

However, while trading commodities online with Samco, the commodity brokerage applicable is Rs. 20 or 0.02% whichever is lower.

Other Costs and Charges in Commodity Trading in India

Brokerage is not the only cost applicable while trading commodities in India. The complete list of charges for trading commodities can be found on the Samco Commodities Charges List.

The other costs of trading include –

Calculate your commodity trading brokerage on the Samco Commodity Brokerage Calculator.

Samco Commodities Limited is one of India’s leading online commodity brokers. Samco facilitates trading in commodities online at a flat fee of Rs. 20 per executed order irrespective of the size of the order traded. So, open a FREE Samco Demat account and start commodity trading in India instantly.

By Deepika Khude

The author is a Certified Financial Planner (CFP) with 5 years experience in Investment Advisory and Financial Planning. Her strength lies in simplifying complex financial concepts with real life stories and analogies. Her goal is to make common retail investors financially smart and independent.

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