Commodity Trading in India: A Detailed Guide for Beginners

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Commodity Trading in India

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A commodity is nothing but goods or assets that has importance in everyday life and can be exchanged for other commodities of the same type in commerce. Commodity is any sort of movable or exchangeable goods and assets except for money that can be bought and sold.


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History of Commodity Trading in India

Commodity Trading has a long history tracing back more than 400 years. Osaka in Japan is known to have been trading commodity futures to trade rice. Commodity trading in India started with the formation of the Bombay Cotton Trade Association in India in 1875.

This has shaped the future of commodity trading in India with the country among growing markets in the world with around 20 exchanges trading over 40 commodities in early 2002. Nowadays commodity trading has become synonymous with derivatives seeing major volume since the turn of the century.

List of Commodity Exchanges in India

Commodity ExchangesCityYear of Formation
Multi Commodity Exchange of India LtdMumbai2003
National Multi Commodity ExchangeAhmedabad2002
National Commodity and Derivatives Exchange Limited (NCDEX)Mumbai2003
Universal Commodity ExchangeGurgaon2013
Indian Commodity Exchange (ICEX)Gurgaon2009
Shariah IndexMumbai2010

Commodity Market Trading Timings in India

Below timings were announced in Oct 2018. These timings shall be revised in Nov 2019:

SessionStart TimeEnd Time (after end of US daylight savings in fall season)
Continuous Trading – Internationally referenceable Non-Agricultural Commodities9:00 AM11.55 pm
Trade Modification Timings
12:10 AM

What Are The Different Types Of Commodities

Enlisted down below are the different types of commodities 

Let us discuss all of them in a little detail,

Types of Commodities
Agricultural Commodities

Agricultural commodities are those important sources of food that are required for either livestock or humans. For Instance, cardamom, cotton, crude palm oil, mentha oil, etc. 

Base Metal Commodities

Base Metal commodities are those metals that are used in the manufacturing of other useful products like aluminum, aluminum minis, copper, copper minis, lead, lead minis, etc. 

Bullion Commodities

Bullion Commodities include precious metals like gold and silver that are used for making jewelry. This type of commodity includes Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Global, Silver Mini, Silver, Silver Micro, Silver 1000, etc. 

Energy Commodities

Energy commodities include products that are used in the production of energy, like crude oil, crude oil mini, brent crude oil, and natural gas. 

Renewable Energy is a good bet in the market today

How To Invest In Commodities

Investing in commodities differs from other types of investments. The biggest difference in investing in commodities is the fact that they are physical goods. 

Enlisted below are various ways in which you can invest in commodities:

  • Direct Investment In Commodity
  • Commodity Futures Contracts
  • Commodity ETF
  • Buying Shares Of Commodity Producing Companies

Let us discuss all of them in a little detail,

 Direct Investment In Commodity

Before investing directly in the commodity, you have to first take into consideration where you can invest directly in the commodity and the arrangement where you can store it. 

Other than that, when you want to sell the direct commodity, you not only have to find a buyer but also handle the logistics of delivery.

Commodity Derivatives

The commodity derivatives are used to eliminate the risk of unforeseen price hike. A derivative is a financial contract whose price depends on the price of another asset. There are two types of Commodity Derivatives, 

Commodity Future Contracts 

Commodity Future Contracts is the best way to invest in commodities. It is an agreement to buy or sell a specific quantity of a commodity at a set price in a future time. Futures are available in every type of commodity. 

The commodity traders use these contracts to prevent the risks associated with fluctuations of price in future trade of goods or raw material. 

Almost 100 commodities are traded in the commodity futures market. Out of which more than 50 commodities like metals, agricultural, energy are very actively traded. 

Commodity Options Contracts

Options are financial instruments that are used for hedging and speculation. The commodity option holder has the right to buy or sell a specific quantity of a commodity at a specified price on or before a specified date. 

The Option agreements involve two parties, namely the seller of the option and the buyer of the option. 

The seller of the option writes the option in favor of the buyer who pays a certain amount to the seller as a price for the option. 

Going further there are two types of commodity options, namely, Call Option and Put Options.  

The call option gives the holder the right to buy a commodity at an agreed price and the Put option gives the holder the right to sell a commodity at an agreed price on or before a specified date.

Commodity ETF

The exchange-traded funds provide commodity exposure to investors who want to do Commodity Trading.

ETFs own shares of companies that produce commodities. Some of the commodity ETFs buy commodities physically and offer shares representing a certain amount of a particular good to the investors. 

While some other commodity ETFs use futures contracts to strategically offer exposure to the investors. However, extended use of commodity futures contract strategies can result in performance that’s far different from how the commodity performs. 

Buying Shares Of Commodity Producing Companies

Although the investors cannot make a direct investment in commodity mutual funds invest in stocks of the companies that are involved in commodity-related industries such as Metals, Energy, Food processing and mining can be made. 

Investing in stocks of such companies involves lots of risks, to be specific company-related risks. But investing in mutual funds in commodity trading offers diversification of the investments, liquidity, and therefore proper money management.

Best Commodity Brokers In India

Selecting the right commodity stockbroker is crucial for investment experience. And therefore we have listed down five best commodity brokers in India. 

Risks of Investing in Commodities

Risks of Commodity Trading
Margin Risk

When you are trading in Commodity Futures, it takes very less amount of money to hold a very large amount of commodity with the help of margin, which can help an investor make money but he can also lose a big amount as well.

Volatility Risk

Commodity Trading in India can be one of the most volatile asset class. It is considered more volatile than bonds, equities, and even currencies. For example, In the recent ongoing Trade War, the daily volatility of oil was around 30% while in the same period the currency market only saw volatility of 10%.

Market Risk

Market risk should also be taken into account when engaging in Commodity Trading in India as things like interest rates, regulation changes, recession, currency risk, etc. can also play a factor when trading a commodity.

In any market, the biggest risk is not having sufficient knowledge of the businesses you are dealing with. Every business has risk which can be categorized under Credit risk, Margin risk, Market risk, etc. but it is up to you to learn about the business and then carry out trading accordingly.

Conclusion

There are various options available for both novices as well as experienced investors looking into investing in the commodity. However one needs to take into consideration the risk that is involved in commodities trading. 

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