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What is

commodity trading?

Commodity trading Involves buying and selling of commodities such as Gold, Silver Crude, Natural Gas, etc., to profit from the price fluctuations. Commodity trading can be classified into 3 categories - Bullion (Gold, Silver, etc.), Energy (crude oil, natural gas, etc.) and Agro (wheat, cotton, etc.)

Commodity prices are continuously affected by real-world events with supply and demand dynamics playing a major role in deciding the commodity prices. Traders predict and monitor these events closely to try and make profit from price volatility . Geopolitical events like - war, elections, protests, etc. also have an important impact on commodity prices.

Trading in commodity markets can be highly liquid, with assets readily bought and sold, and they can also be quite volatile, with prices subject to rapid and significant fluctuations. This volatility can offer both opportunities and risks for traders in commodity trading. Commodity trading is done by various types of traders, including, individual retail traders, institutional investors, and commercial entities. Hedging through commodity markets forms the backbone of many industries, by helping businesses lock-in the supply of raw materials needed for production at specific rates.

Successful commodity trading, especially when trading commodities online, demands a deep understanding of the specific commodity being traded and market dynamics. Furthermore, it involves using smart ways to handle risks and take advantage of opportunities in this ever-changing commodity market.

In India, commodities are traded majorly on below exchanges

• MCX - Multi-commodity Exchange
• NCDEX - National Commodity and Derivatives Exchange
• ICEX - India Commodity Exchange
• NMCE - National Multi-commodity exchange

The commodity markets in India are open from 09:00 AM (Monday) to 11:30 PM (Friday) in two sessions

1) Morning sessions till 5 PM

2) Evening Session 5:00 PM to 11:30 PM.

How to trade in the

commodity market?

To start trading in the commodities market, one needs to open a commodity trading account, with a broker who is a member of a commodity exchange. Once you open a commodity trading account online, you can trade in various commodities like - Gold, Silver, Crude, Natural Gas, Wheat, Aluminum etc.

Traders can trade commodities through futures contracts, options, commodity ETFs or directly buying and selling physical commodities.

Choose an online broker and open a Commodity Trading account. Make sure you have a valid PAN Card, Aadhar Card and Bank Statements, which you are required to submit for KYC verification.

Commodity trading requires you to deposit an upfront margin amount into your trading account, which will be used to fund your trades. The margin amount you deposit should align with your risk tolerance and trading strategy.

Gain thorough knowledge of different commodity types and the factors affecting their prices, stay updated with recent happenings in the real world and get expert opinion to solidify your stance on commodity price movements before you finalize a trade.

Before getting started, you should choose a trading strategy that suits your goals as well as trading personality. Based on your risk appetite and trading personality, you can choose from multiple strategies such as trend following, mean reversion, scalping, etc.

You can place your trades online from your broker’s website or app during the commodity markets’ working hours which extend up to 9 PM. You can choose to place your order through any one of the below order types:

• Market Order: Executes a trade at the current market price.

• Limit Order: Specifies the price at which you want to buy or sell a commodity. It only executes if the market reaches that price.

Pro Tip: Remember to always use stop-loss orders to limit potential losses.

Closely monitor the market and commodities you have chosen. Keep an update on the news, events, and economic conditions that can have an impact on the commodities. Keep adjusting your trading strategy as and when needed based on market conditions.

What are the benefits & risks

associated with commodity trading?

Commodity trading offers benefits like higher leverage, portfolio diversification, inflation hedge etc. with geopolitical events being a major risk. By offering higher leverage and extended trading hours, commodity markets appeal to a large population of traders.

While commodity trading offers a variety of benefits, there are certain risks that a trader needs to be aware of before venturing into commodity trading. Let’s understand the risks and rewards associated with commodity trading in detail

Traditionally commodities futures and options contracts require lower margins as compared to other markets. As a result of this, traders with small capital can initiate larger positions with higher leverage, thereby magnifying their returns on capital. For example - A Crude Oil Option can be traded for as low as Rs 500 on the day of its expiry.

Commodity trading enables you to diversify your portfolios by exploring various raw materials like metals, energy resources, and agricultural products. This diversification helps spread risk and reduce dependency on traditional assets, such as stocks and bonds.

Commodities can be traded online and settled in cash, allowing investors to trade commodities without the need to physically handle the goods. This accessibility makes it easier for individual investors to participate in commodity market trading.

Commodities, such as gold and oil, tend to rise in value during inflationary periods. They can help protect the real value of your investments. Having these commodities in your portfolio, can potentially safeguard your investments against the eroding effects of inflation.

While trading in commodities might prove beneficial, there are certain risks that come along. Understanding the below risks can help you take appropriate steps to manage them while trading in commodities.

Commodities are prone to significant price fluctuations due to factors like supply and demand imbalances, geopolitical events, and weather conditions. This price volatility can lead to both substantial gains and losses.

Unlike dividend-paying stocks, many commodities do not generate income. Trading in commodities rely on capital appreciation for returns, making your capital more reliant on price movements.

Regulatory risks in the commodities market are concerns about changes in government regulations and policies that can have a deep impact. Governments often introduce new laws or amend existing ones to address environmental, trade, taxation, or safety issues. To reduce risks like this, it is often suggested to adjust strategies when needed.

How do I get started in

commodity trading in India?

To get started with commodity trading in India, it is important to first understand the commodities being traded, and their price dynamics. Before you trade in a particular commodity, it is important to understand which factors impact its prices and learn all about those factors.

Getting started in commodity trading in India can be exciting but it is equally risky. It is important to have enough knowledge before investing and keep learning every day to profit in the market.

To get

Understand the various types of commodities you can invest in and what the difference between them are and what the factors that can affect their prices are. Solid understanding of the market is very important to success. This knowledge equips traders to make informed decisions.

Once you have a solid foundation of what the commodities market is and factors that can impact it, the next step is to select a specific commodity to focus on. Choosing the right commodity is very important as to align it with risk tolerance and objectives. Each commodity has a different level of risk and reward associated with it, and hence choosing the right commodity to trade becomes utmost important.

Managing risk is important to sustain yourself in the market for a longer period of time. To do this, you can set sound risk management strategies. Stop-loss orders, a commonly used technique that serves as a safety net against substantial losses. A stop-loss order defines the maximum loss you are willing to accept on a trade. Implementing effective risk management techniques at the right time is important in the commodity market.

With commodity markets continuously impacted by various geo-political events and happenings around the world, it is always advisable to stay updated with latest happenings to study the impact of it on the commodity price.