What Is Commodity Trading?

Commodity trading is where various commodities and their derivatives products are bought and sold. A commodity is any raw material or primary agricultural product that can be bought or sold, whether wheat, gold, or crude oil, among many others. When you engage in commodity trading, such commodities can diversify your asset portfolio.

If you want to explore commodity trading, take the first step, and brush up on your basics. Get acquainted with the commodity market and how things work here.

Types Of Commodities Traded In India

There are four main categories of commodities you can trade:

1. Metal: In the market, you can trade metals like iron, copper, aluminium, and nickel, used in construction and manufacturing. In addition, precious metals like gold, silver, and platinum.

2. Energy goods There is a bulk trade in household and industrial energy goods. Natural gas and oil fall into this category. Other energy commodities include uranium, ethanol, coal, and electricity.

3. Agricultural goods The commodity market trades various agricultural and livestock products. A few examples are sugar, cocoa, cotton, spices, grains, oilseeds, pulses, eggs, and feeder cattle.

4. Environmental goods Carbon emissions, renewable energy, and white certificates fall into this category. In general, gold, silver, crude oil, Brent oil, natural gas, soybeans, cotton, wheat, corn, and coffee are the most traded commodities around the world.

Commodities Traded on the Multi Commodity Exchange Of India (MCX) and the National Commodity And Derivatives Exchange (NCDEX)

Types Of Commodities

Before you begin commodity trading, learn about the types of commodities available for trade. Some common categories are:

1. Agricultural (e.g. chana, soya bean, jeera, rice, rubber)

2. Metals (e.g. industrial metals like aluminium, copper and lead, and precious metals like gold and silver)

3. Energy (e.g. natural gas, crude oil, coal)

How Does A Commodity Trading Work?

Assume you purchased a gold futures contract on MCX at Rs. 72,000 per 100 grams. On MCX, gold's margin is 3.5%. This means you will pay Rs. 2,520 for your gold. Assume that gold prices increase to Rs. 73,000 per 100 grams the following day. Then, Rs 1,000 will be credited to the bank account you linked to the commodity market. Now imagine that it drops to Rs. 72,500 the next day. Your bank account will be debited with Rs. 500. Trading commodities offers higher leverage but also higher risk because the market fluctuates frequently.

Types Of Commodity Market

There are two types of commodity markets: derivatives markets and spot markets.

Spot Markets

A spot market is also known as a “cash market” or “physical market”, where traders exchange physical commodities for immediate delivery.

Derivatives Markets

There are two types of commodity derivatives markets in India: futures and forwards. Futures contracts use the spot market as the underlying asset and give the owner control at a future date for a fixed price. Upon contract expiration, the commodity or asset is physically delivered.

The major difference between forwards and futures is that forwards are customised and traded over the counter, while futures are traded on exchanges and are standardised.

Commodity Exchanges

To participate in the commodity market in India, you must know how to trade in commodity exchanges. A commodity exchange is a regulated market where the trading of commodities takes place. Traders may choose not to take physical delivery of commodities and instead deal in Futures contracts. A Futures contract is an agreement to buy or sell a fixed quantity of a commodity at a pre-decided price and within a stated expiry date.

Here are the national commodity exchanges in India:

1. Multi Commodity Exchange of India Ltd (MCX)

2. National Commodity and Derivative Exchange (NCDEX)

3. Indian Commodity Exchange (ICEX)

4. National Stock Exchange (NSE)

5. Bombay Stock Exchange (BSE)

Trade In Commodity Futures:

Many traders in the commodity market in India trade through Futures contracts. Businesses use Futures to hedge against the prices of commodities that they handle to minimise the risk of financial loss. The commodity market in India also draws participation from speculators.

Advantages And Disadvantages Of Commodity Trading

Here are the advantages and disadvantages of commodity trading:

Our Trading Platforms:

1. Self-trading platforms:

Trade through our website, desktop application, or mobile app to trade on the go. Open a commodity trading account with us to enjoy:

• Easy portfolio tracking

• Market alerts and research reports

• Commodities market live streaming

• Personalized watchlist feature

• Real-time commodity market trading

• Live technical commodity charts

2. Dealer-assisted trading:

Visit the nearest Kotak Securities branch or get the support you need from a dedicated dealer desk/relationship manager. Here’s what else to expect:

• Dealing support at designated branch

• Access to Call and Trade facility

• Efficient risk management

• Research reports via SMS and email

• Real time trade alerts

Benefits Of Commodity Trading With Kotak Securities

Know the advantages of being a Kotak Securities customer when you open a commodity trading account with us.

• Operational support:

From explaining how to open a commodity trading account and other commodity trading basics, to resolving order-related issues, we support you at every step. In-depth research: Make the most out of our commodity research reports and snapshots. We provide outlooks on active commodities in Bullions, Metals, Energy and Agri.

• Trade recommendations:

Get detailed buy and sell recommendations in real-time for commodity market trading.

• Educational resources:

Hone your knowledge of commodity trading basics with our comprehensive guides to the commodity market.

• Corporate advisory:

Our corporate desk advises on hedging strategies and monitors your positions. We help you withstand market fluctuations to generate high risk-adjusted returns.

How To Open A Commodity Trading Account

To trade in commodities, you need a trading account, and a linked savings bank account. Here’s the account opening procedure:

1. Fill account opening form

2. Submit relevant documents

3. Complete the in-person verification

We provide you with the account details once your application is processed successfully.

How To Trade In Commodity Futures

Here's a step-by-step guide to getting started with commodity trading:

Steps 1: Choose a Commodity Broker

There are two types of brokers to consider - full-service and discount brokers. Full-service brokers have physical branches and generally charge higher fees due to their extensive setup. On the other hand, discount brokers operate primarily online, offering lower fees and potential benefits like free trading and account opening.

Steps 2: Open Demat and Trading Account

Once you've decided on a broker, the next step is to open a Demat and Trading account. These accounts are mandatory for commodity trading. To open them, you'll need to provide documents like your PAN card, Aadhar card, age proof, income proof, and bank account statement. Brokers often allow you to upload these documents online.

Step 3: Make an Initial Deposit

After receiving your account details from the broker, you'll need to make an initial deposit. It's a good practice to deposit around 10% of the contract value of the commodity you want to trade, in addition to a maintenance margin.

For example, if the margin requirement for trading a particular commodity is INR 40,000, you should deposit INR 4,000, along with the maintenance margin. The maintenance margin acts as a safety net to cover potential losses if the market moves against your expectations.

Step 4: Analyze Your Trade

After executing your commodity trade, you can analyze your trading position & take necessary steps.