Beginner's Guide to Agri Commodity Trading - Motilal Oswal
Beginner's Guide to Agri Commodity Trading - Motilal Oswal

Beginners Guide to Agri Commodity Trading

After meeting your short-term financial goals, you may want to diversify your portfolio. If you are looking to generate high returns to meet your long-term financial goals, agri commodity trading may be right for you. Agri commodity trading takes place via future contracts. These contracts can be used for hedging against risk or an opportunity to profit from speculation. A commodity is an essential product. Agro commodities fall into the category of soft commodities; hard commodities are usually mined products.

- How to trade in agri commodities?

The modern form of commodity trading has been allowed in India since 2002. You can trade in the agricultural commodity market by buying and selling futures contracts on any of the six exchanges that allow agri commodity trading. Out of the six exchanges that allow commodity trading on their platforms, two of them are specifically focused on agricultural commodities trading. These exchanges are National Commodity & Derivatives Exchange Limited and National Multi-Commodity Exchange. Trading in agri commodities used to be complicated before 2017. However, in late that year, the Securities and Exchange Board of India allowed trading in commodities from regular Demat accounts.

If you want to invest in the agri commodities market, you can research a commodity and speculate its price. If you are confident in your assessment of future prices, then you should pay the margin amount to your broker and buy a futures contract. At the future date mentioned in the contract, the sale would be executed. Brokers allow considerable leverage when it comes to commodity trading, you should be aware of the risks involved. A few wrong bets could quickly reduce your life savings to nothing.

- Agri commodity market

Agro commodities comprise about 12 percent of total trade in commodities. The agri commodity markets do not exist for every agricultural product. Agri commodity trade takes place only in major commodities on six commodity exchanges in India. These products are generally cash crops. Some frequently traded products are spices, cereals, pulses, oilseeds, rubber, fibers like cotton and jute, dry fruits, etc.

- Benefits of agri commodity trading

Apart from providing a viable diversification option, agri commodity trading can provide you effective hedging options against risks. You may also be able to profit from the difference between the spot and futures prices. Additionally, trading in agri commodities works as an efficient price discovery mechanism that provides buyers and sellers an idea of future prices. If you have a good understanding of supply and demand in the agricultural commodity markets, you could make considerable returns on your capital, particularly as higher than usual margins are available on agri commodity trading.

- Conclusion

Agri commodity trading is as risky as trading in stocks. You should be aware of the risks before placing your bets in the market. The good news is that you can find most information about the agri commodity trade online. There are well-known strategies to reduce risks such as using stop losses or trading in options. It is also very easy to open an online commodity trading account which will allow you a platform to trade in commodities with ease.

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