Commodity Trading

Commodity trading involves buying, transporting, storing, transforming, and selling physical commodities while also managing related assets.
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Commodity Trading
OPEN ACCOUNT
3 mins
08-March-2025

Commodity trading involves the buying, selling, transporting, storing, and transforming of physical commodities, along with asset management. Traders operate in markets for raw materials like metals, energy, and agricultural products, ensuring supply chain efficiency and price stability. This process requires market analysis, risk management, and logistics coordination to optimise trade flows and profitability while adapting to market fluctuations and global demand shifts.

What is commodity trading

Commodity trading in India involves the buying and selling of physical goods like metals, energy, and agricultural products on exchanges such as MCX and NCDEX. It allows investors to trade in commodities through futures contracts, enabling price speculation or hedging against market fluctuations. Commodity trading is regulated by SEBI, ensuring transparency and accountability.

Investors can diversify their portfolios and capitalize on price movements, making it a popular option among those seeking exposure to physical goods and economic trends in India.

Commodity exchanges in India

 

  • Multi Commodity Exchange (MCX): The MCX is the oldest commodity exchange in India. It was founded in 2003 and is headquartered in Mumbai. The MCX offers a wide range of commodities for trading, including metals, energy, agriculture, petrochemicals, and other softs.
  • National Commodity and Derivatives Exchange (NCDEX): The NCDEX is a commodity exchange in India with diverse product offerings setting a benchmark for both agriculture and non-agri commodities derivatives segment. It was incorporated in April 2003 and commenced operations in December 2003. The NCDEX focuses on agricultural commodities.
  • Indian Commodity Exchange (ICEX): The ICEX is a commodity exchange that was founded in 2009. Its headquarters are in Mumbai, and it offers a trading platform throughout the country through its network of appointed brokers.
  • National Multi Commodity Exchange (NMCE): The NMCE is a commodity exchange that was founded in 2002. It is headquartered in Ahmedabad. The NMCE offers a wide range of commodities for trading, including metals, energy, agriculture, and other softs.

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Types of commodity markets

Commodity trading generally takes place in two types of markets:

  • Spot markets: Also called "cash markets" or "physical markets," where commodities are exchanged immediately for cash.
  • Derivatives markets: These involve futures and forwards contracts. Futures are agreements to trade commodities at a set price on a future date, based on the asset’s current market value. Upon expiration, the physical commodity is delivered to the contract holder.

Types of commodity investment

Commodity investments are classified into four major categories:

  • Metals: Includes industrial metals like iron and copper, as well as precious metals like gold and silver.
  • Energy Goods: Encompasses natural gas, crude oil, and uranium, crucial for both household and industrial use.
  • Agricultural Goods: Involves products like wheat, sugar, cotton, and livestock.
  • Environmental Goods: Focuses on renewable energy, carbon emissions, and white certificates.

Globally traded commodities include gold, crude oil, natural gas, soybeans, and coffee.

Types of Commodities Traded in India (MCX)

India’s Multi Commodity Exchange (MCX) handles various commodities, such as:

  • Agricultural commodities: Includes black pepper, castor seed, crude palm oil, cardamom, cotton, mentha oil, rubber, and palmolein.
  • Energy: Primarily natural gas and crude oil.
  • Base metals: Brass, aluminium, lead, copper, zinc, and nickel.
  • Bullion: Mainly focused on gold and silver.

These commodities are actively traded on the Multi Commodity Exchange (MCX) in India.

Types of Commodities Traded in India (NCDEX)

  • Cereals and pulses: Includes maize (Kharif/south, Rabi), barley, wheat, chana, moong, and paddy (basmati).
  • Soft commodities: Sugar.
  • Fibres: Such as kapas, cotton, guar seed, and guar gum.
  • Spices: Pepper, jeera, turmeric, and coriander.
  • Oil and Oilseeds: Includes castor seed, soybean, mustard seed, cottonseed oil cake, refined soy oil, and crude palm oil.

These commodities are actively traded on the National Commodity and Derivatives Exchange (NCDEX).

How does commodity trading work?

Commodity trading involves the buying and selling of tangible goods such as metals, agricultural produce, and energy resources. This process takes place through organised platforms that enable investors to trade while mitigating market risks.

To begin trading, individuals must:

  • Choose a broker – either a full-service broker for expert advice or a discount broker for lower fees.
  • Open a demat and trading account by submitting required documents such as PAN, Aadhaar, and proof of income.
  • Deposit an initial amount, usually 10% of the contract value, and maintain margin requirements.
  • Execute trades via commodity exchanges, brokerage firms, or online trading platforms.

How to start trading in commodities and things to consider while investing

  1. Open a trading account with a registered broker.
  2. Comply with the Know Your Customer (KYC) process and provide a valid PAN card and other identification documents.
  3. Fund the account with sufficient capital before starting trading in commodities.
  4. Select the commodity you want to trade and understand the market dynamics of the selected commodity before investing.
  5. Determine the trading strategy that you wish to adopt, such as spot trading, futures trading, or options trading.
  6. Subscribe to real-time news feeds on commodity markets and stay up to date with supply and demand trends.
  7. Identify and manage your risks, such as price volatility and margin requirements.
  8. Execute trades through your broker's trading platform and monitor your positions closely.
  9. Work with a reputable and trustworthy financial service provider to access research and analysis tools that can inform your trading decisions and help you achieve maximum returns.

Different ways to trade in commodities

  1. Spot trading – In spot trading, traders buy or sell physical commodities for immediate payment and delivery. For instance, a trader may purchase a certain quantity of crude oil at its current market price and receive the delivery of the same.
  2. Futures contract – Futures contract involves buying or selling futures contracts that denote the future delivery of a certain commodity at a pre-determined price. The price of futures contracts is based on the market's expectations of supply and demand for commodities. Futures contracts have a standardized size and contract length that differs from one contract to another.
  3. Options contract – An options contract provides the right but not the obligation, to purchase or sell a commodity at a pre-determined price on or before a specific date. In other words, options contracts give traders the right to buy or sell a commodity without the obligation to do so. Options contracts are more commonly used by traders who wish to benefit by predicting price movements in the commodities market.
  4. Commodity ETFs – Commodity Exchange Traded Funds (ETFs) track the price performance of a commodity index. They are designed to provide exposure to a basket of commodities allowing investors to gain diversified exposure without taking physical delivery of the underlying asset.
  5. Commodity shares – Commodity shares are an indirect way to invest in commodities by buying shares of companies whose primary business involves the production, distribution, or marketing of commodities. For instance, investing in the shares of a crude oil producer like Exxon Mobil can offer investors exposure to the performance of crude oil prices.

Tips for Successful Commodity Trading:

  1. Educate yourself: Understand the basics of commodity trading, market dynamics, and trading strategies.
  2. Develop a plan: Create a well-defined trading plan with clear entry and exit criteria.
  3. Risk management: Only invest what you can afford to lose and implement risk management tools like stop-loss orders.
  4. Stay informed: Keep track of global news, economic indicators, and market trends that affect commodity prices.
  5. Start small: Begin with a smaller investment and gradually increase your exposure as you gain experience.

Diversification

Investing in commodities allows traders to diversify their portfolios, reducing the risks associated with market fluctuations. Unlike stocks and bonds, commodity prices often move in the opposite direction, providing a hedge against market downturns. For example, in times of geopolitical instability, investors may shift their funds from stocks to safe-haven commodities like gold or silver.

Protection against inflation

While inflation negatively impacts consumers by raising the cost of goods, it can benefit commodity traders. Since inflation drives up commodity prices, holding such assets ensures that investment values grow, helping traders maintain their purchasing power even in high-inflation periods.

High liquidity

Commodities offer significant liquidity, allowing traders to buy and sell assets easily. Unlike real estate or fixed deposits, commodity investments can be quickly converted into cash, ensuring greater flexibility and control over funds.

Disadvantages of commodity trading

Leverage risks

Commodity trading typically offers higher leverage than stock trading, increasing profit potential but also the risk of excessive losses. Overtrading can become an issue, especially if the market moves against the trader’s expectations.

Volatility

Commodities are generally more volatile than stocks and bonds, with some, like crude oil and gold, experiencing extreme price swings. This unpredictability can make decision-making challenging for traders.

Economic and geopolitical sensitivity

Commodity prices are highly influenced by global economic conditions and political events. For instance, an increase in crude oil production can lead to price drops, while geopolitical crises can cause sudden spikes. Traders must stay well-informed about global developments to navigate these fluctuations effectively.

Closing note

Commodity trading is a fascinating and potentially lucrative endeavor that demands thorough understanding and continuous learning. By grasping the fundamentals, embracing risk management, and staying informed about market trends, you can navigate the complex landscape of commodity trading with greater confidence. Remember that success in commodity trading requires patience, discipline, and a willingness to adapt to ever-changing market conditions. Whether you're an aspiring trader or an experienced investor, this comprehensive guide provides a solid foundation to embark on your commodity trading journey.

Read related articles:

What Is Intraday Trading?
Different Types Of Stock Trading
What Is Online Trading
What Is Margin Trading
What Is Crude Oil Trading?

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Frequently asked questions

What are examples of trade commodities?

Commodities traded globally include categories like metals (gold, silver, copper), energy (crude oil, natural gas), agricultural goods (wheat, sugar, coffee), and livestock (feeder cattle, pork bellies). Commodities are tangible assets essential for production and consumption.

Which commodity is best for trading?

The best commodity for trading depends on market conditions and individual risk tolerance. Popular choices include gold, crude oil, and natural gas due to their liquidity, volatility, and potential for profitable trades.

How to trade commodities for beginners?

Beginners should start by researching commodity markets, opening a trading account with a registered broker, and using demo accounts to practice. Learning about futures contracts, market trends, and risk management strategies is essential before committing real money.

How much money is required for commodity trading?

There is no minimum amount of money required for commodity trading. Many brokers allow traders to start with a small margin deposit, often ranging from 5% to 10% of the contract's total value. However, it's recommended to have sufficient capital to manage risks effectively.

What is the minimum capital to start commodity trading?

There is no fixed minimum capital requirement for commodity trading in India. However, the investment amount depends on factors like the type of commodity, contract size, and market volatility. You can begin trading with as little as Rs. 500 on commodity contract expiry days, as some contracts allow smaller capital entry.

What does a commodity trader do?

A commodity trader is an individual or business that engages in buying and selling physical commodities such as metals, oil, and agricultural products. Traders seek to generate profits by predicting market trends and identifying arbitrage opportunities, where price differences in different markets can be leveraged for financial gain.

How to start commodity trading?

To begin trading in the commodities market, one must open a commodity trading account with a broker who is registered with a recognised commodity exchange. Once the account is set up, traders can buy and sell a variety of commodities, including gold, silver, crude oil, natural gas, wheat, and aluminium, through online trading platforms.

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