The Basics of Commodity Trading in India

Commodities are goods used in everyday life which are movable and exchangeable. Commodity trading refers to the buying or selling of commodities or various financial instruments based on the commodities.

In today’s scenario, amidst the dominance of the stock market, commodity trading in India has been escalating continuously and has gained a lot of importance over the last decade.

Here we enlist the basics of commodity trading to help you develop a better understanding of the same.

Options Trading in Commodities

Options are one of the commonly traded financial instruments in commodity trading. There are two types of commodity options - a call option and a put option.

These options are quite flexible, which enables their holder to participate in price movement. You can buy and sell options based on your requirement and the position of the market.

In case of options trading, you are likely to get relatively higher returns. Also, the maximum possible losses are restricted to the price of the options.

Categories in the Commodity Market

The commodity market is divided into four categories, including:

· Metals - gold, silver, platinum, and copper among others

·  Energy - crude and heating oil, natural gas and gasoline

· Livestock and meat

· Agricultural produces like corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar among others

Major Commodity Trading Exchanges in India

It is imperative to know the best platforms for trading in commodities before you plan to invest your money in the commodity market in India. Let’s take a look at the major commodity trading exchanges in the country:

·  Multi Commodity Exchange – MCX

· National Commodity and Derivatives Exchange - NCDEX

· National Multi Commodity Exchange - NMCE

·  Indian Commodity Exchange - ICEX

·  Ace Derivatives Exchange - ACE

·  The Universal Commodity Exchange – UCX

Out of all these, MCX - Multi Commodity Exchange is India’s largest commodity derivatives exchange. An MCX broker acts as an intermediary between the commodity trader and commodity exchange (MCX).

Why You Should Invest in Commodity Trading

You should consider investing in commodity trading to:

·  Diversify your investment portfolio.

· Protect your funds during inflation as commodities can maintain their value even during high inflation.

· Trade on lower margin to increase the potential of high profits.

·  Hedge against risks of natural disasters, wars, and economic crises.

Future Contract for Commodity Trading

A future contract is an agreement to buy or sell a commodity in the future at a pre-determined price with a specified quantity. You can avail this facility in all types of commodities to maintain liquidity. This is one of the best ways to start commodity trading in India.

Some investors also invest with Exchange Traded Funds (ETF) and Exchange Traded Notes (ETN) to engage in commodity price fluctuations.

This post can help you understand the basics of commodity trading. If you have any other suggestions for people who want to invest in commodity trading, please feel free to share them in the comments below.