In this article, we will cover
» What are commodities?
» What is commodity trading?
» How to start commodity trading or investing?
» Where can you invest in commodities?
» Advantages & disadvantages of commodity trading
What are commodities?
Commodities are products or goods like metals, food, energy etc. that we use in our day to day lives. Commodities are tradable in nature i.e. they can be bought and sold freely.
The four major types of commodities are:
Metals - Gold, Silver, Platinum, Copper etc.
Energy - Crude oil, Gasoline, Heating gas etc.
Agriculture - Wheat, Rice, Cocoa, Ragi etc.
Livestock & Meat - Eggs, Cattle etc.
Commodity trading has been happening in India since ancient times; however, poor government policies, fragmented markets and foreign invasions reduced its popularity.
But with the introduction of exchanges like MCX and NCDEX commodity trading in India is regaining its importance and popularity.
What is commodity trading in India?
Commodity trading is the buying, selling and trading of commodities. Commodity trading in India is usually done through derivative contracts such as commodity futures and options.
A commodity derivative contract like futures and options derives its value from the underlying asset i.e. commodity.
The underlying commodities are raw materials or primary goods such as wheat, gold, crude oil, etc. rather than manufactured or processed products, Commodity trading is usually done in lots, such as barrels of oil, bushels of corn, kgs of wheat, etc.
On maturity, you can either take the physical delivery of the product or settle in cash, as per the terms of the contract.
You can also profit from the price fluctuations in commodities without directly investing in futures or other derivative instruments through exchange-traded funds or exchange-traded notes.
How to start commodity trading in India?
To start commodity trading in India, you need the following things:
- Trading and Demat account with a reliable broker, like Samco.
- Basic understanding of commodity markets
The best way to invest in commodities is through commodity futures. Commodity futures is a contract to buy or sell a specific commodity at an agreed price on a future date. Futures are available for every commodity listed on the exchanges like MCX.
Commodity trading is generally used to hedge prices to prevent losses related to substantial price swings in essential commodities. Commodity trading is considered to be risky, so generally only experienced traders and investors try their hands at commodity trading.
But with adequate guidance and a good commodity broker like Samco, even beginners can create wealth in commodity trading in India.
Read more about how to invest in a commodity?
Where can you invest in commodities?
The most well known and famous exchange to trade in commodities is the Multi Commodity Exchange or MCX followed by National Commodity and Derivatives Exchange or NCDEX.
However other exchanges that facilitate commodity trading in India are:
- National Multi Commodity Exchange – NMCE
- Indian Commodity Exchange – ICEX
- Ace Derivatives Exchange – ACE
- The Universal Commodity Exchange – UCX
Advantages and disadvantages of commodity trading in India
There are several advantages and disadvantages of commodity trading in India.
Commodity trading provides protection against inflation or sudden price increase.
Commodity trading can help one hedge prices against a black swan event which may lead to a price hike or deep discount.
Commodity futures can provide high leverage, meaning a small fluctuation in price can actually lead to huge profits.
Commodities can help with diversification and avoid over-concentration from extensive exposure to shares.
High Leverage is like a double-edged sword; novice traders can suffer huge losses if not trained properly
Commodities are highly volatile, so one wrong trade can lead to wiping out your wealth completely
Commodity funds are concentrated in 1 or 2 industries and hence do not provide adequate diversification. A change in the price of a commodity can have a substantial impact on the share price of a commodity ETF.
The commodity markets have grown over 120 times since the launch of electronic trading in 2003 and provide excellent wealth creation opportunities.
With guidance from good commodity brokers like Samco, you too can start creating wealth through commodity trading in India.
Open a commodity trading account with Samco in just 5 minutes and start reaping the benefits of commodity trading in India.