Over the past decade, traders and investors believe the stock market to be one of the best options to invest their savings. The stock market is preferred over any other investing options as it provides good returns and helps build a considerable corpus over time. Commodity trading has established itself to be the second-best option for traders. Commodity trading began in India as a trading option but later on, emerged as a prevalent profession among Indians. This article will take you through commodity trading in a very detailed manner.
What is Commodity Trading?
Commodity encloses a group of assets that plays a vital role in supporting our lives, like any other basic necessities, including food, energy etc. Commodity trading includes trading of any commodity on an exchange basis. Their price keeps on fluctuating and is either bought or sold depending on their price. The traders use this price fluctuation to gain profit. All the commodities in India fall under four broad categories, Agriculture, Energy, Metals, and Livestock.
Where can you invest in Commodities in India?
Commodity trading is effortless and convenient in India. Anyone can take up commodity trading through exchanges. You can trade in India through six primary commodity exchanges, which include:
1) National Commodity and Derivatives Exchange (NCDEX).
2) National Multi Commodity Exchange (NME).
3) Multi Commodity Exchange (MCX).
4) The Universal Commodity Exchange (UCX).
5) Indian Commodity Exchange (ICEX).
6) Ace Derivatives Exchange (ACE).
Before investing in any of these trading commodities, you must have all the relevant details about trading along with the details of the company.
How to Invest in the Commodity Market?
You can take up commodity trading in the commodity market through a futures contract. It is a type of contract where you make an agreement to either buy or sell a specific commodity depending on the predicted price. Through the futures market, you can trade in any commodity. The position of a trader in the futures market relies on the movement of the predicted price. For example, a trader would invest in a specific part of the commodity if he expects the cost of that particular commodity to go high. Similarly, the trader will sell a particular part of the commodity if he expects the commodity’s price to go down.
When is commodity trading done in India?
Indian commodity markets are open on all days of the week except for weekends and public holidays. Market timings of the commodity markets in India depend on the commodities. Some of the commodities like Agri Commodities are open from 9 am to 9 pm. In contrast, other commodities, including bullion, crude oil, metals, and internationally linked Agri commodities are closed much later, around 11.55 pm.
The Security and Exchange Board of India (SEBI) extended the timings for commodity trading, as it could invite more participants along with deepening the commodity markets.
How can commodity trading be beneficial?
The benefits of commodity trading include:
1) Hedging: In commodity trading, the trading of a particular commodity is done on a pre-decided price. So the price fluctuations don’t affect the agreement.
2) Speculation: Traders can make considerable profits in commodity trading by speculating the price changes of the future.
3) Arbitraging: Arbitraging is done when the price of a particular commodity differs from market to market. In such situations, traders buy the commodities at low prices and instantly sell them at a much higher price.
These benefits allow the trader to make sufficient profit through commodity trading. If commodity trading is done very smartly and carefully, it can help you make huge money.
How to select a broker for Commodity Trading?
The selection of a commodity broker is one of the most challenging parts of commodity trading. The choice of the right broker is very vital as your trading entirely depends on it. So the selection must be made very cautiously, considering a variety of factors. While selecting a broker, you must carefully analyze the broker’s credibility and must select only certified brokers. You must also check whether the broker provides the facility of commodity trading online as your whole trading experience depends on the services offered by the broker. The brokerage price charged by the broker is another crucial factor to be considered before selecting a broker.
You must take the demo of the service before selecting the right broker to ensure the quality of services provided by the broker. If the trader offers commodity trading online, you must first check the online trading platform and understand the working of the platform entirely before investing. Before investing, you must gain adequate information about the money deposit along with the whole trading mechanism followed by the trader. The proficiency of services, accessibility, and customer support team must be cross-checked before selecting the broker. You must ensure the strength and proactiveness of the customer support team, as it will be assisting you during any queries or issues.
How to open a commodity trading account?
After selecting the right broker for your trading, the next step for trading would be to open a commodity trading account. This account is the primary requirement for commodity trading. In order to open a commodity trading account, you need to submit an application form along with all the necessary documents like your id proof, financial statement, and source of income. This application form will then be either accepted or rejected by the broker, depending upon your financial and other details. This step is crucial as it allows the broker to make informed decisions about whether he should be making an agreement with this particular trader or not. This decision judges his future profit or loss to a great extent.
What is the minimum amount required for investment?
After making an account, the trader will have to invest a particular sum of money as the initial amount in order to start his trading. This deposit money must be at least 5 – 10% of the total contract value. Along with this initial deposit, the trader also needs to pay a maintenance amount to the broker. This maintenance amount covers all the losses that might occur during adverse market conditions.
Importance of Trading Plan
A trading plan or strategy plays a vital role in commodity trading. You can make the trading highly profitable by adopting the right trading strategy. This trading plan depends on the financial goals and risk-bearing capability, so you must make the plan as per them. The trading plan differs from trader to trader as what is suitable for one might not be for another. You must conduct in-depth research before mapping the adequate trading strategy.
All in all, the result of commodity trading depends entirely on the traders and brokers. So if the trader is aiming towards profit, he must act very smart and judge spontaneously. The whole profit depends on the trading skills of brokers, proper understanding of the entire trading process, and selection of appropriate brokers. You must also be able to know where to put a stop and must never be lured by the profits. The trader must also adopt various risk management techniques to minimize the risks and maximize the returns.