What is MCX?
Among the different types of trading, commodity trading is fast becoming a popular avenue for generating short-term returns. Although it was incorporated recently in 2003, the Multi Commodity Exchange (MCX) has established itself as one of India’s most preferred commodity exchanges. With online MCX trading, traders can capitalise on the price movements of a variety of different commodities using derivative contracts such as futures and options.
All of the commodity derivative contracts available on the exchange are standardised to ensure uniformity and make trading easier. In addition to commodity derivatives, MCX also offers commodity indices that track a basket of different commodities. Traders and other stakeholders interested can use these indices to gauge the performance of a section of the commodity market or the market as a whole.
What are the various commodities available for trading on MCX?
The MCX trading exchange offers as many as 14 different commodities across four major segments - bullion, base metals, energy, and agri-commodities. Here is an overview of each of the four segments and the various commodity derivatives you can trade on the exchange.
1. Bullion
The bullion commodity segment comprises two of the most popular precious metals in India - gold and silver. Through the online MCX trading exchange, you can trade in as many as four different gold derivative contracts and three silver derivative contracts. The list of contracts is as follows.
- Gold
- Gold Mini
- Gold Petal
- Gold Guinea
- Silver
- Silver Micro
- Silver Mini
2. Base metals
The base metals segment of the commodity market comprises some of the key non-precious metals. The MCX trading exchange offers the following base metal derivative contracts for trading.
- Aluminium
- Aluminium Mini
- Copper
- Lead
- Lead Mini
- Nickel
- Steel Rebar
- Zinc
- Zinc Mini
3. Energy
The energy segment of the commodity market comprises two of the most popular energy sources in the world - crude oil and natural gas. On the online MCX trading exchange, you can find the following four derivative contracts available for trading.
- Crude Oil
- Crude Oil Mini
- Natural Gas
- Natural Gas Mini
4. Agri-commodities
As the name implies, the agri-commodities segment comprises agricultural commodities. The MCX trading exchange has four different agri-commodity derivative contracts. The list is as follows.
- Cotton
- Kapas
- Crude Palm Oil
- Mentha Oil
How does MCX trading work?
To trade on the Multi Commodity Exchange, you need to first open a commodity trading account with a stockbroker. Since commodities are assets that cannot be stored electronically, you do not require a Demat account to start trading in them. Once you have opened the account, all you need to do is log into your broker’s commodity trading platform. Then, you need to select the type of commodity you wish to trade.
Let us assume that you wish to trade in gold futures. The minimum order quantity (lot size) of a gold futures contract is 1 kg. The current per-g market price of the metal is Rs. 5,500. So to purchase 1 lot of gold futures, you would have to pay Rs. 55,00,000 (Rs. 5,500 * 1,000 gms).
However, since derivative contracts such as futures and options are leveraged financial instruments, you can purchase 1 lot of futures by simply depositing a fraction of the entire trade value as a margin. Let us assume that the margin requirement of a gold futures contract is 5% of the total trade value. This means that to purchase 1 lot of gold futures, you would only have to deposit Rs. 2,75,000 as a margin.
Note: The margin requirement for intraday trading of commodities is generally much lower compared to carry-forward (regular) trading.
Once you place the buy order on your commodity trading platform, the order is automatically forwarded to MCX by your broker. Here, MCX finds a match for your buy order for 1 lot of gold futures with a corresponding sell order for 1 lot of gold futures with the same price. If there is a match, the commodity exchange executes the trade.
At this point, you can hold the gold futures contract until its expiration date. If you do hold it until contract expiration, the contract will be physically settled. This means that 1 kg of gold that you purchased will be physically delivered to you by the seller of the contract. This physical delivery mechanism is applicable for all commodity derivative contracts held until expiry.
Alternatively, if you do not wish to get physical delivery of commodities, you could simply square off your position by selling the contract to another trader before the expiration date. If the value of gold is higher at the time of square-off than when you purchased it, you will end up with a profit. However, if the value of the gold drops after you have purchased the futures contract, you will end up with a loss.
Conclusion
The MCX plays a crucial role in the country’s commodity ecosystem by providing a robust platform for trading a wide spectrum of agricultural and non-agricultural commodities. By buying and selling derivatives on the MCX trading exchange, you could potentially profit from the short-term price movements of commodities.
However, it is crucial to first ensure that you have a thorough understanding of how commodity derivatives work. Compared to share trading, commodity trading has different risks, which you need to know about before you start. This way, you can protect your investment capital and ensure that you make informed trading decisions.
