Have you ever wondered how commodities like gold, silver, rubber, oil, zinc, natural gases, and many such commodities are traded in the financial markets? Like stocks and bonds, commodities are also traded in the stock market without buying or selling the commodity physically. Isn’t that an exciting thing? So, if you keep learning how commodity trading works, here is a detailed guide for all aspiring commodity traders.
What is commodity trading?
Commodities refer to the raw materials and materials used to produce different products we use in our daily lives. Like other asset classes, commodities are also traded on the commodity exchanges, which can be termed the meaning of commodity trading. Commodity trading can help you diversify your portfolio and offer a good return over the long term.
Usually, the commodity market has two types of traders – the ones are hedgers, and the other ones are speculators. The hedgers can be the buyer and the producer of the commodities who try to protect their commodities by purchasing commodity futures contracts.
The other ones are the speculators who try to make a profit out of the changes in the price of the commodity and the volatility present in the market.
Commodity trading in India
Commodity trading in India mainly includes four broad categories of commodities which are –
- Energy: This includes oil and natural gas primarily
- Bullion: Gold and silver
- Base Metals: Copper, Zinc, Aluminium, and lead
- Agriculture: Black Pepper, Cardamom, oil, rubber, cotton, and others
While these four are broad categories, many other commodities are there, which get traded on the commodity exchanges in the country. While there are Multi Commodity Exchange of India Limited (MCX), National Commodity and Derivatives Exchange Limited (NCDEX), and Indian Commodity Exchange Limited (ICX), which offers commodities only, there are NSE and BSE, which provide different commodities along with other asset classes.
Steps for commodity trading
For trading commodities, you can follow these steps mentioned below –
# Step 1
First, you need to have a trading account for buying and selling commodities in India. You need to keep in mind that you cannot use the margin that you have in your stock trading account for trading commodities and vice versa. This means that for trading commodities, you need a commodity trading account. While most brokerage houses offer a single account for trading stocks and commodities, the trading margin available for the asset classes will be different.
# Step 2
The next step is to fund the account with a deposit. You can make an initial deposit which can be around 5% to 10% of the value of the commodity futures contract, provided how much margin is being offered by your brokerage house.
# Step 3
Now you have the commodity trading account and funds in it. The next step would be selecting the right commodity. For the same, you need to analyze the price movements, market trends, demand, and supply of the commodities and pick the commodity that has the potential to offer good returns over time. You can also follow experts’ tips for commodity trading and pick commodities accordingly.
# Step 4
Once you have selected the commodity you want to buy, you need to place an order for the same. You can place a limit order or a market order as per your trading strategy. Select the commodity and click on the option to buy it. You need to enter the volume that you want to buy or sell and place the order. If you want to place a limit order, then enter the price at which you want to purchase or sell the commodity.
# Step 5
Finally, you need to check whether your order has been executed or not, especially if it is a limit order. Then after execution of the order, keep an eye on the price of the commodity you have purchased so that you can sell it when the price reaches your anticipated/ desired price level.
Why trade commodities?
If you are wondering why you should invest in commodities? Or is commodity trading profitable or not? Then there are certain factors you need to understand.
- Investing in commodities can help you diversify your portfolio to a great extent. Commodity prices move slowly compared to other assets, but in the long run, they usually offer better returns than many different asset classes.
- If you want to hedge against inflation and the risk of geopolitical events, then commodity trading can help in hedging such risks as well. It can hedge against rising prices of commodities due to inflation or geopolitical events. A recent example is the rising oil prices due to the Russia Ukraine war.
So, if you are looking for diversifying your portfolio or hedge risks of commodity price movement, then trading commodities can be a great option. All you need to do is to follow the steps mentioned above, and you can trade commodities without much hassle.