Basic guide to commodity trading and MCX margin.

Currency and Commodities 11 January 2021 1:39:PM

Commodity-market-min

What is a Commodity Market?

The market involves trading in raw or primary products such as hard and soft commodities. Gold and oil that are mined or extracted are categorized as hard commodities whereas agricultural products or livestock such as corn, wheat, and pork are categorized as soft commodities. Some of the major commodity exchanges are the Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), and London Metal Exchange (LME). In India, we have two major exchanges Multi Commodity Exchange (MCX) and National Commodity & Derivatives Exchange Limited (NCDEX). The most convenient way of investing in commodities is through Futures contracts which are backed by physical assets and other ways are exchange-traded funds(ETF) or gold bonds Why you should trade in the commodity market? Since 2019 gold futures prices have rallied close to 80% and made an all-time high of 56191. So for example you had invested 50000 in MCXGOLDMINI futures at the beginning of 2019 at the market price of 33100 and at 56191 near an all-time high your value of 50000 would be worth 2,30,910 (cost not deduced).

3 things to know about investing in the commodity market in India

  • You need to open an account with a registered broker ( MCX, NCDEX, NSE, BSE). The account opening is fairly simple and the basic KYC documentation is needed.
  • Commodity market investing, is primarily a futures market that is backed by physical assets. To invest in this, a minimum margin ( money) is required. We will discuss this more in detail later here. A usual minimum that is needed is based on the contract value which ranges between 5%-10% of the value or minimum amount INR5,000 (GOLDGUINEA) to start with.
  • The Market timings, are different from the equity markets and are -
  • 9am to 11.30pm( 11.55pm during daylight saving) : Non Agri commodities
  • 9am – 5pm : Agri commodities

Why should you trade in the commodity market?

Gold, which is considered a safe investment, has rallied close to 80% in the futures market and made an all-time high of INR 56,191.

So for example you had invested INR50,000 in MCXGOLDMINI futures at the beginning of 2019 at the market price of INR33,100 and at INR56,191 near an all-time high your value of INR50,000 would be worth INR2,30,910 (cost not deduced).

Gold, which is usually a hedge in a lot of portfolios, if traded in with the right guidance and strict stop losses can also be a beneficial investment.

Why are Commodity margins important?
Margin is the amount that we keep with the broker to buy/sell any commodity futures contract. It is generally 10% of the whole contract value. For example, if you want to buy GOLD Jan 2021 contract, ideally you will have to pay INR 50,00,000 (50,000*100) to purchase 1kg of gold. But when you purchase a futures contract, you just pay 10% of the total contract value i.e. around INR 5,00,000

Basic types of margins:

Initial Margin:

To start trading in the commodity you need to deposit a sum in your account with the broker this sum is called the initial margin. The different commodity has a different margin requirement which ranges between 5 to 10 % depending on the volatility.

Maintenance margin:

While you are trading in commodities there will be times when the market trends will go against you and the trade will be in loss. This loss will affect the amount balance in your account thus leading the account balance to fall below a particular point. Since your account balance has dropped below a certain level your broker would ask you to top up your balance this is called the maintenance margin. You may receive a margin call if you fail to maintain the minimum maintenance margin.

Advantages in Commodity margins?:

Generally, commodity trading requires a lower margin when compared to equity trading. The main reason being volatility in the Commodity market is lower than equity. A commodity like gold will have a daily range of 1 % on extreme cases will move 4% this is because the commodity has some fundamentals attached to it. Whereas on the other equity can see extreme move which could be more than 10%.

As the commodity margin is lower the major advantage for a commodity trader is that he has a leeway of higher exposures which would help him generating excess returns on his capital. But on the flip side due to high exposures trader faces high risk during sudden and sharp movement. 

GEPL Capital is one of the leading full-service broking firms and we provide the best services on commodity trading also, With our experts, you can easily learn how to do commodity trading and earn on your investment. For more details on how to save tax in India, contact our experts. Visit Here.