The commodity market is a place where some of the most essential goods and raw materials exchange hands. Normally, you’d think that farmers and other institutions may occupy this market.
The truth is – you as a retail trader can buy and sell commodities too via derivatives!
In fact, you can start commodity trading in just 3 easy steps! But, before we get to them, you can benefit from knowing the essentials of the commodity market. We’ll walk you through them!
What Types of Commodities are Traded in India?
There are many commodities traded in India, right from fruits to energy. What you’re concerned with are exchange-traded commodity derivatives that have liquidity and volume.
“Exchange-traded” means that the commodity derivatives operate in a standardized manner on an exchange such as MCX or NSE.
Liquidity and volume mean that you’re not the only one trading – there are many others placing the same or opposite trades. With that as a criterion, not many commodities make it into the mix.
However, there are still enough commodity derivative contracts being traded. What’s more, Gold Futures (December 2022) alone have a traded value of Rs. 5,31,180 lakhs!
Types of Commodities for Trading
- Bullion: Gold, Gold Mini, Gold Petal, Gold Guinea, Silver, Silver Mini, Silver Micro
- Base Metals: Aluminium, Copper, Lead, Nickel, Zinc
- Cereals/Grains/Pulses: Black Pepper, Crude Palm Oil, Cotton, Mentha Oil, Rubber
- Energy: Natural Gas, Crude Oil
These commodities form an essential core of the derivatives segment. They are the ones with the highest liquidity and volume
While the commodity market of today may be bustling with these many types of commodities, its beginnings were humble.
India’s first organized and managed commodity futures trading establishment was founded in 1875.
Back then, only cotton futures were traded on the exchange aptly called “Bombay Cotton Trade Association”.
Shortly after discontent among various cliques (we’ll spare you the details) another exchange was established by the name “Bombay Cotton Exchange”.
Later, derivative trading opened up in 1900 for other commodities like oil seeds courtesy of the Gujarati Vyapari Mandali. Fast forward to 2022, multiple commodities are traded on multiple exchanges.
Where are Commodities Traded?
You can trade commodity derivatives on these Indian exchanges:
- Indian Commodity Exchange (ICEX)
- Multi Commodity Exchange of India (MCX)
- National Commodity and Derivative Exchange (NCDEX)
- National Multi Commodity Exchange of India (NMCE)
- National Stock Exchange (NSE)
At this point, you must be wondering why there are so many exchanges for commodity trading, especially if you’re coming from a background in online stock trading. Let’s take a step back.
The reason why centralized commodity exchanges exist is to mitigate counterparty risk.
Back in the day, buyers and sellers often ran the risk of entering into worthless contracts. A buyer may pull out, a seller may “lose” their products, and so on.
This was solved by establishing centralized exchanges that could see to it that counterparty risk is minimal, if not obsolete. Centralized exchanges also lead to the standardization of futures and options.
These are just some of the reasons why there are commodity exchanges. In India, each commodity exchange gives you access to a set of raw materials and goods whose derivatives you can trade.
MCX lets you trade derivatives for Aluminium and Zinc while NCDEX allows it for Steel Long. These are metals, by the way, which can be traded during a specific time in the commodity market.
When Can You Trade Commodities?
Every market has an opening and closing time. The commodity market is no different. Trading begins at 9.00 AM and goes on till 11.30 PM. This is known as Commodity Trading Time.
During this window, you can trade commodity futures and options for base metals, precious metals, and other non-agri products till 11.55 PM. However, agri products can only be traded till 5.00 PM.
Holidays are a part and parcel of life, not just the markets. During some of these holidays, the commodity market remains closed. We’ve covered it in detail over here: Commodity Market Holidays. If you’re trading specifically on MCX, check out this blog: MCX Trading Holidays 2023
Now that you have a clear idea of the what, why, and when of the commodity market, it’s time to move on to the main question – how to start commodity trading!
Did you know: The currency market is open for nearly as long as the commodity market. Curious? Read: Forex Market Hours & Holidays in India for 2022
How to Start Commodity Trading?
- Understand why you want to trade
- Open a Commodity Trading Account
- Complete your KYC
- Fund your Trading Account
- Start Trading Commodities
Understanding why you want to trade is the first step to do commodity trading. The obvious answer is for profits. But what else is driving you to trade commodities?
If it’s just for the thrill of it, the likelihood of making bad calls may be amplified. That’s why narrowing down the reasons why you want to enter the commodity market is crucial.
In line with this, you must also evaluate your risk profile. The goal of doing so is to figure out whether or not you can trade in the first place.
Someone with no liabilities in their 20s can handle more risk than someone with several liabilities in their 50s. After all, commodities are leveraged products where the chance of losing big exists.
Moving on, you’ll need to open a commodity trading account with an authorized broker to enter the commodity market. Most traders choose their broker based on several factors.
Some of them evaluate the features While others check margin, leverage, DPC, and more. Speaking of awesome features, you can trade commodities directly from TradingView charts on Dhan.
Once you choose your broker, the next step is to complete the KYC process. This is essential to verify your identity and proof of income.
Furthermore, the information you provide during your KYC is an important component of your contract note, which captures all the trades that you make on every exchange.
The broker, depository, and commodity exchanges will verify your KYC documents. After you get all the necessary approvals, your commodity trading account will be active.
What after? Simply fund your account and start trading commodities! Now you know how to trade in the commodity market in India! You’re ready to explore other segments: