What Is Commodity Trading?

Commodity trading involves buying and selling commodities and their derivatives products. The term commodity refers to any raw material or primary agricultural product that can be bought or sold. To start trading in commodities, first, choose a commodity broker and open a commodity trading account. Then, do your research on the commodities market, understand the risks involved, and set your investment goals. Develop a trading strategy and start trading through the exchange. Keep a close watch on the market trends and news to make informed decisions. Read the article to know more.
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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.

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.

Agricultural commodities: There are a number of agricultural commodities, such as black pepper, castor seed, crude palm oil, cardamom, cotton, mentha oil, rubber, and palmolein.Cereals and pulses: Barley, Wheat, Chana, Moong, Paddy (basmati), Maize Kharif/South.
Energy: Natural gas, Crude oilSoft: Sugar
Base Metals: Aluminum, Brass, Lead, Copper, Zinc, NickelFibres: Kappa’s, Cotton, Guar seed, Guar gum
Bullion: Gold, SilverSpices: Pepper, Jeera, Turmeric, Coriander
-Oil and Oil seeds: Cottonseed oil cake, Refined soy oil, Crude palm oil, Castor seed, Soybean, Mustard seed, Cottonseed oil cake

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)

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.

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.

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.

Here are the advantages and disadvantages of commodity trading:

Advantages Disadvantages
When the cost of goods increases, the price of primary goods and raw materials increases, causing commodity prices to rise. Therefore, commodity trading becomes profitable when inflation rises.Margin trading can be a double-edged sword if you are inexperienced. In the market, leverage allows traders to bid big. A margin of 5 percent allows one to buy commodity futures worth Rs 100,000 for only Rs 5000. Therefore, traders can lose significant amounts of money even with the slightest change in price.
Investing in commodities can enhance traders' profit potential. By paying a margin of 5 to 10 percent, traders can take a significant position in the market. As a result, even a small increase in price can increase profits exponentially.Commodity trading has higher returns due to commodities' high volatility.
As raw materials have a negative to low correlation with stocks, investors can diversify their portfolio by investing in commodities.Commodities are not suitable for portfolio diversification despite their negative correlation with securities. Commodity prices do not move opposite of stock prices as experienced during the 2008 economic crisis. Inflation, unemployment, and reduced demand affect raw material demand and halt company production.
Commodity markets are highly regulated and transparent. By using electronic trading, the market is more transparent and efficient, eliminating the risk of manipulation.To generate significant returns, commodity trading requires bulk investment.
-When commodities are invested for diversification, commodity investment tools typically focus on one or two industries, resulting in a higher concentration of assets.

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

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.

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.

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.

FAQs On Commodity Trading

Crude oil commodity trading is best for beginners as it is always in demand.

The three types of commodities that are traded are: Metals (Industrial and precious), Energy (Fossil Fuels, Renewables, and power), and Agricultural (Softs and livestock)

Commodities can be invested in several methods, such as by purchasing physical goods like gold or exchange-traded funds that track specific commodity indices. Alternatively, you can buy shares of companies related to commodities, such as oil and gas producers or precious metal miners.

You can profit from commodity trading if you are knowledgeable about the factors that influence commodity prices. There is no doubt that commodities can and have offered superior returns, but they are still considered to be among the most volatile asset classes.

There is no set minimum investment requirement for commodities trading in India.

A commodity in trading is any raw material or primary agricultural product you can buy or sell, like wheat, gold, or crude oil. Such commodities can diversify your portfolio if you trade them.

The main trade commodities are gold, silver, crude oil, copper, natural gas, and agricultural products like coffee, wheat, and sugar.

To start trading commodities, you'll need a Demat account with National Securities Depository Limited (NSDL) or Central Depository Services (India) Limited (CDSL). All your investments are held in a 'dematerialised' or electronic state in the Demat account.

Yes, commodity trading is easy.

You can trade commodities on commodity exchanges in India, such as the National Commodity & Derivatives Exchange Limited (NCDEX), the Multi Commodity Exchange of India Limited (MCX), and the Indian Commodity Exchange Limited (ICEX).

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