What does NCDEX do?
Several factors influence the prices of agricultural products, causing them to fluctuate based on market conditions. External factors such as storms, droughts, early or delayed monsoons, and natural calamities significantly impact pricing. To mitigate potential losses, a farmer anticipating a price drop may seek financial security through a futures contract. This contract allows them to sell their produce at a pre-determined price on a future date. NCDEX plays a crucial role in facilitating these trades, acting as an intermediary between farmers and buyers.
How does NCDEX works?
NCDEX, a professionally managed multi-commodity exchange, is primarily an online platform for buying and selling agricultural commodities. However, it has widened its horizons and started trading in other commodities, such as energy resources and metals.
How to trade at NCDEX?
- The process begins with registering market participants, including commodity producers, traders, and institutional investors.
- Traders must complete the Know Your Customer (KYC) process.
- Upon KYC verification, traders gain access to the National Commodity & Derivatives Exchange's online trading platform, where they can monitor trade volumes, price movements, real-time data, and market analytics.
The trading mechanism utilises advanced technology to ensure speed, accuracy, and transparency. Participants can engage in various types of trading, such as spot trading, where commodities are exchanged for immediate delivery, or derivatives trading, which includes futures contracts. These contracts allow traders to buy or sell agricultural produce or other commodities at a predetermined price on a future date. Derivatives trading is an effective tool for hedging against price volatility.
Functions of the NCDEX
The functions of the NCDEX include the following:
- To act as a platform for price discovery and risk management for a plethora of commodities
- To provide ancillary services like clearing and settlement
Currently, the exchange offers derivative contracts for agricultural commodities and non-agricultural commodity across seven categories.
These seven categories include the following:
- Cereals and pulses
- Oil and oil seeds
- Fibres
- Soft commodities
- Guar complex
- Spices
- Metals
What does NCDEX primarily trade?
The National Commodity & Derivatives Exchange Limited (NCDEX) offers a comprehensive range of permitted agricultural commodities, totaling 23—the largest such selection. These commodities, including pulses, spices, and guar, are unique to NCDEX in the global market and hold significant economic importance for India, contributing substantially to the nation's international trade.
Advantages of NCDEX
To understand NCDEX, it is essential to recognise its benefits. Here are the key advantages of this prominent commodity exchange.
1. Market transparency
NCDEX has greatly contributed to increasing market transparency by providing an online platform to trade in commodity derivatives. The process of buying and selling commodity derivatives happens online, and every investor can review and analyse the market prices, expiry dates, and other factors without any possibility of fraud or scams.
2. Effective price discovery
NCDEX provides a transparent and efficient platform for price discovery of agricultural and other commodities. This helps farmers to price their products more accurately even if they are not participating in the derivatives market.
3. Lower costs
NCDEX has reduced the cost of price data for farmers by removing middlemen. Previously, intermediaries controlled market information, but the platform now empowers farmers with direct access to pricing and trade insights.
4. Improved agriculture practices
NCDEX has played an important part in developing improved agriculture practices in the country. The introduction of the exchange has increased overall quality awareness through standardisation of quality requirements. Now, farmers are more aware of producing high-quality crops.
How to open an NCDEX Demat account?
Now that you understand NCDEX, here’s how you can open a demat account for commodity trading.
1. Choose a stockbroker
Compare and analyse various stockbrokers who are members of the NCDEX commodity exchange. Compare their features and associated costs to find the most suitable one.
2. Fill out the application form
Complete the application form to open the NCDEX demat account with all the personal and bank details. You will also have to submit documents such as a PAN card.
3. In-person verification
In-person verification is compulsory to open an NCDEX demat account. The stockbroker will verify all the information and documents before approving them.
4. Demat account opening
After successful verification, the stockbroker will open your NCDEX demat account. You must deposit margin money after the account is opened to start NCDEX trading.
Benefits of trading on NCDEX
Now that you know the meaning of the NCDEX and its functions, let us understand the various advantages of trading on this commodity exchange.
1. Platform for price discovery
One of the main advantages of the NCDEX online platform is price transparency. At any point in time, commodity traders and agricultural producers can monitor the demand and supply dynamics and price movements of commodities. Thanks to such a free flow of information, market participants can efficiently discover the prices of various commodities.
2. Hedging of risk
In India, the prices of agricultural commodities can be very volatile since they are prone to seasonal fluctuations. Due to the increased volatility, agricultural producers and processors often endure significant losses. However, by using commodity derivatives like futures and options, they can hedge their risk effectively by taking up a contrarian position.
For instance, if an agricultural producer involved in cultivating paddy wishes to hedge against downside risk, they may choose to enter into a short position using paddy derivative contracts available on the NCDEX market. The profit from the short position will likely offset or reduce the real-world loss that the producer may incur due to a fall in the price of paddy.
3. Standardised contracts
The derivative contracts available on the NCDEX are standardised in terms of quantity. Retail traders who wish to trade in commodity derivatives can only do so in lots. This ensures smooth and hassle-free trading and settlement of contracts.
4. Mark-to-market (MTM) settlement cycle
In a Mark-To-Market (MTM) settlement cycle, the profits or losses from changes in the commodity prices are settled at the end of every trading day. This essentially means that if your open position incurs a loss or a profit, it will be reflected in your account at the end of each day.
The exchange will make a margin call if any fund shortfall arises due to a loss-making position. This requires you to deposit additional funds to cover the losses. Since the NCDEX follows the MTM method of settlement, the chances of dishonour of derivative contracts are negligible.
Conclusion
The NCDEX is one of the largest commodity trading exchanges in the country. The exchange specialises in agricultural commodities and offers an efficient and transparent way to profit from the price changes in these commodities.
However, before you start trading in derivative contracts available on the NCDEX commodity platform, remember to check the mode of settlement. Some contracts are mandatorily settled via physical delivery, meaning that the commodity you purchase will be physically delivered to you if you hold the contract until expiry. If you don’t wish to take physical delivery of commodities, make sure you square off your open positions before the contract expiration date.
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