Commodities are a part of our day-to-day life. knowingly or unknowingly we are using commodities every day. Food, energy, metals, and other commodities are examples of commodities. In today's blog, we are going to discuss how the commodity market in India works. Always keep in mind that a commodity is by definition exchangeable. Things are a little different in the world of organized commodity trade.
Commodity trading is gaining popularity among investors again. This trading takes place on a commodities market, where a variety of commodities and derivatives are purchased and sold. Agricultural products and contracts based on them are the most regularly traded items. However, non-agro commodities such as diamonds, steel, and energy are increasingly traded.
What is a commodity market in India?
Previously commodity was traded in a barter system but over the period of time, they are exchanged in terms of currencies or traded in an electronic form where only cash flow is exchanged rather than the actual commodity. But before starting with commodity trading let's understand the basics of commodity and commodity market.
In simple terms, the commodity is a good used in trade that is exchanged with other goods of the same type. Examples of commodities include grains, gold, oil, and natural gas. We have both, a physical marketplace where the actual physical commodity is exchanges and a good example would be “Mandi” in India and also in electronic format through future and options. Commodities traded are categorized into four broad parts Bullions(Gold and silver), metal (aluminum, copper, lead, nickel, and zinc), Energy(crude oil and natural gas), and Agricultural(channa, turmeric, etc.).
Prior to talking about commodity trading, you will need to pick up a broker which provides service for commodity trading. GEPL Capital Pvt Ltd are a full-service broking firm that offers multiple investment products to customers for trading in Equities, derivatives, commodities, currency, and IPO segments via NSE & BSE.
Now let’s talk about trading commodities and to start with commodity have future and options market similar to equity market but with the option of physical delivery in billions and base metal products. To trade commodities, understanding the demand and supply impact on commodity prices is very important. In general, it is difficult to predict the demand-supply because it is unpredictable due to lots of uncertainty like weather conditions, epidemics, and natural disasters. But to simplify we have divided it into two segments economic data to analyze demand and inventory data to analyze supply.
Economic data such as the Non-Farm Employment Change and the gross domestic product helps us in understanding the demand side, for instance, good GDP number may be positive for the crude oil prices as the economic activities are picking up whereas the downside to this will it can effect negative for the Gold price as there is no uncertainty (gold move higher when there is fear in the market). On the other hand inventory data such as crude oil, inventory helps us in understanding the supply side. If the inventory data is higher than the previous data it sends a signal that the investors are rising which may to higher supply.
Commodity trading markets in India:
In India we have a big psychical market for commodities especially for the agriculture market called a “Mandi” but at this point in time, we shall focus on the futures market. If we talk above the future and options market there are two primary exchanges where commodities are traded first Multi Commodity Exchange of India Limited (MCX), where majorly base metal, bullion, and energy product are treaded and on the other hand NCDEX, where agriculture product is traded. Let’s learn briefly about the exchanges in India.
The Multi Commodity Exchange of India Limited (MCX), India’s first listed exchange offers trading in commodity derivative contracts segments including bullion, industrial metals, and energy commodities, as also on indices constituted from these contracts. It is also India’s first Exchange to offer commodity options contracts.
National Commodity & Derivatives Exchange Limited (NCDEX) is a leading agricultural commodity exchange in India. The Exchange has a multiple of commodities aggregating to a total of twenty-three, and includes commodities such as pulses, spices, and guar, which are rarely traded on any platforms in the global market, and are related to the economic activate of India.
Generally, a good amount of liquid is found in future contracts but on the other hand, options have lower liquidity as they are recently launched on the exchange. Timings for trading on MCX are 9.00 am to 11.30 pm (11.55 pm during daylight saving) and for NCDEX are 9.00 am to 9.00 pm. MCX has also launched two new future indexes named Bulldex (Bullions index) and Metaldex (Base Metal index) and in some days also will be coming up with Energydex (Energy Index).
Types of commodities traded in India:
The below all mention commodities are traded in India but in this, we have not included the agriculture commodity which are traded on NCDEX. To trade commodity market it is important to understand the risk and to understand the exposure it is important to know the lot size and the margin requirement.
Benefits of commodities trading India:-
The speculator has a bad reputation as people term speculation as manipulation. Speculation in the commodities markets helps in working financial markets, but also food supply chains running smoothly. On the other hand, manipulation is an unethical activity that leads to economic failure. Speculators are risk-takers who place their bets on the short-term future direction of movements in an asset without having any ownership of that asset. Another function of speculators is, they provide liquidity, helps in price discovery, and also act as a counterparty for other traders.
Only 3 months left in 2021 and if you haven't invested your money it's your time to look at stocks for short-term investment. Every week on Friday we come out with ...Read More
With reference to the SEBI circular dated 20th July 2020, Peak Margin has been introduced in the Equity, Commodity & Currency segment from 1st December 2020. W.e.f 1st June 2021, there ...Read More
The private placement of Tata Motors comes with a coupon of 9.10 percent. The private placement of Tata Motors Finance Ltd (TMFL) comes with a coupon of 9.10 percent. The private placement of ...Read More