The following article will discuss the commodities market and how it started in India. It will highlight the types of commodities markets and the various commodities trading by classifying them into different categories.
It will also inform the readers about the commodity exchanges and some reputed brokers in India. This article will break down the complex terms related to commodity trading in simple and layman's words.
History of Commodity Trading?
Organized commodity trading began in India with the setting up of the Bombay Cotton Trade Association in 1875. However, the foundation of the commodities market was laid way before that—way before any other country.
The Bombay Cotton Exchange was established in 1893, which eventually led to establishing futures markets in edible oilseeds, jute, and other jute products.
So, now that we know the remarkable history of the Indian Commodity Markets, let us dive into what commodity trading is and why there's so much buzz about it these days.
Stocks are not the only thing people invest in, trade, and earn money from. If done carefully, commodity markets can give some very promising returns. Commodities, being the building blocks of any economy, are widely traded across the globe.
The meaning of commodity trading is the buying and selling of various commodities and their derivative products. Let us break this definition and understand every part of it in detail to make it more lucid.
First, the commodities are traded in bulk. Unlike shares, you cannot buy as many units as you want. Instead, you have to buy the commodities in many multiples of that lot. The prices of these commodities are set according to the market forces of demand and supply.
The commodities traded in the Indian Commodities Market can be classified as agricultural and non-agricultural commodities. The non-agricultural commodities are sub-classified into three categories: bullion, energy, and base metals. Different commodities that are regularly bought and sold on the exchanges are:
- Agriculture: Black pepper, cardamom, castor seed, cotton, palm oil, kapas, wheat, paddy, chana, bajra, barley, sugar, and many more
- Bullion: Gold and silver
- Energy: Crude oil and natural gas
- Base Metals: Aluminum, copper, lead, nickel, and zinc
- The top traded commodities in India are gold, silver, copper, and cotton.
Types of Commodities Markets
There are two types of commodity market which are as follow -
- Spot Market: These are also called physical markets, or cash markets, where traders exchange commodities for instant delivery.
- Derivatives Market: It includes futures and forwards. It allows users to trade the commodities at a predetermined price on a fixed date. The traded commodity is delivered physically upon the expiry of the contract.
Commodity Exchanges in India
Commodities are exchanged through MCX, NCDEX, etc. MCX and NCDEX are the most commonly used commodity trading platforms in India.
- Multi Commodity Exchange: Established in 2003, MCX is widely used for non-agriculture commodities trading.
- National Commodity and Derivatives Exchange: Founded in 2003, it is mainly used for trading agricultural commodities.
Participants of the Commodities Market
Participants play a very important role in maintaining the quality of the markets. The participants in the commodities markets can be mainly classified into Hedgers and Speculators.
- Speculators: They are not directly involved in the production and use of the commodities but are present in the market for short periods to make gains through speculating the prices. They make use of the momentum present in the market and ensure liquidity.
- Hedgers: These are generally the people who have an underlying in the commodity they are trading. They trade in those commodities to eliminate the risk of price fluctuations of that specific commodity in the market. For example, a company that makes cotton products as raw material is hedged in cotton for a fixed period. It remained indifferent to the price fluctuations of that time.
These participants form pillars of the market and jointly determine the market's direction.
How to Trade in the Commodities Market
Just like you need a Demat account to trade in stocks, you need a Demat account to trade in commodities. There are numerous options available for choosing a broker to open a Demat account with. However, you need to ensure that you open your account with a reputed broker that offers competitive rates and less brokerage. You need to carefully analyse and choose the broker who can provide higher margins.
Online Commodity Trading
Similar to equity and securities, you can also do online trading of Commodities. The commodity is a very lucrative asset class to trade-in. Again similar to NSE and BSE exchanges which are generally used for trading shares.
NCDEX (National Commodity & Derivatives Exchange Limited) and MCX (Multi Commodity Exchange of India Limited) are the most popular exchanges traded commodities in India.
The trading market for commodities works differently than the equity market. Unlike equities, the commodities are traded with margin requirements which change according to market fluctuations.
Why Should You Trade in Commodities?
- First of all, buying commodities like gold and silver is the best way to diversify your investment portfolio.
- Secondly, Commodities provide risk-adjusted returns. Unlike equity commodities, prices rise when equity markets indicate red returns.
- The commodity market is inflation-proof; as money loses its value from inflation, the prices of commodities tend to rise during inflation.
Commodity Trading Time
In India, the commodity market trading times are different for different types of commodities. The commodity exchange takes place every weekday, from Monday to Friday. Declared holidays by the exchange are notified to the traders in advance.
Commodity Market Opening Time
All the commodity markets open at the same time, i.e. 9:00 am. So from 9 am onwards, you can start trading in all commodities.
Commodity Market Closing Time
The commodity market has different closing times for different commodities.
- Non-Agri commodities trades end time is 11:30 pm.
- For Agri commodities such as cotton & Kapas, the market closes at 9:00 pm.
- And for all other commodities, the market closes at 5:00 pm.
- All the Intraday position's square off time is 25 minutes before the market closes, and the trade modification can be done 15 minutes after the market closes, i.e. 11:45 pm.
Traditional banks such as HDFC Securities and ICIC Direct also provide commodity trading facilities.
Which Broker to Open Your Account With?
Choice India provides its account holders with cutting-edge tools for stock trading for ease of trading for clients. With Choice, investing and trading in the commodity market will be easier for seasoned investors if you are a beginner and extremely intuitive.