How to Trade in the Commodity Market
The commodity markets may be rife with trading and investing opportunities, but these are nascent in India. Beginners and experts both find trading in commodities a challenge. Knowing how to trade commodities is the key to getting the task right. If you are used to investing in equities, commodities may appear unique to you. Your path to trading commodities is to get some know-how first.
Getting to Know Commodities
How to trade commodities is more complex than how to trade in equity. As a first step in trading in equity, you have to open a Demat account. You have to do this if you wish to trade in commodities too. Equity is common knowledge to novices today, but commodities may not be. So, the first thing to know about and ask is, “What is a commodity?”. Simply put, you could say that commodities comprise the basic raw materials employed to create products used in daily life. They are, essentially, the blocks that any global economy is built upon.
It is essential to know that commodities are traded via derivatives contracts, the derivative being the underlying asset (the commodity) that gives value to the contract. In the Indian context, the commodities which are primarily traded in are broadly classified with their sub-categories:
- Basic Metals (base metals) - Zinc, lead, copper and aluminium.
- Agriculture - Rubber, coffee, tea, cotton, wheat, oil, and others.
- Energy - Natural gas and oil.
- Bullion - Silver and gold.
How to trade in commodity markets starts off by knowing what commodities are and which you want to trade in. You should also know that some of the most popular commodities in commodity trading today are corn, gold, crude oil, wheat and coffee.
How to Trade Commodities
Getting familiar with any assets for trading and investment serve you well as a potential trader or investor. This means that you must familiarise yourself with not just the commodity in question but the exchange that a commodity is traded in as well, among other aspects of commodity trading. Here are some handy hints you could call steps to know how to trade in the commodity market in India:
- Know the Exchanges for Commodity Trading - In the Indian sphere of commodity investment, commodities are traded via major exchanges like the National Multi Commodity Exchange of India, or the NMCE, the Multi Commodity Exchange, or the MCX, and the National Commodity and Derivative Exchange, or the NCDEX.
- Get a Good Broker to Know How to Trade in Commodity Markets - Reliable brokers registered with the Securities and Exchange Board of India (SEBI) are a good source of gaining knowledge about commodities to trade. In addition, full-service brokers are proficient in recommendations of how to trade in commodity markets.
- Start a Trading Account - After an investor has chosen a reputable brokerage, the next thing to do is to create a trading account for commodities. This, like a trading account for equities, is connected to a Demat account.
- Making Deposits and Establishing Plans - After a trading account is opened, investors must deposit a margin amount which is typically 5%-10% of the commodities trading contract.
Final Words
While you must open a Demat account to trade in commodities, the actual trading is not so simple. Commodity trading involves investment in futures and options contracts or direct investment (like buying gold off the counter). For some commodities like gold, ETFs can be traded too. Commodity trading can be great for diversifying a portfolio, as can investing in any upcoming IPO be profitable too.
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