How to start Commodities Trading
Due to the fast-growing nature of India's economy, there are a large number of investors looking for profitable investment opportunities in the Indian markets. While some individuals prefer to keep their money in savings, fixed deposits, or provident funds, others go to the capital markets and invest directly in companies that help the country flourish.
The majority of investors in the capital markets choose stocks, bonds, and mutual funds to invest in equity or debt. The commodities market, on the other hand, is another investment option for people seeking portfolio diversity. Commodities’ trading is not as popular in India as equity trading, due to the absence of awareness, but it offers equally appealing opportunities to invest and generate long and short-term wealth/gains.
Open a Demat Account
Types of commodities
To begin trading commodities in India, one must first know the types of commodities available for investing. Knowing the market allows you to make informed investment decisions that will not lead you astray on your investment journey.
Agriculture, precious metals, energy, services, and metals and minerals are the five key sectors of commodities. Commodities in these sectors include:
- Agriculture: Spices, grain, pulses, oil, and oilseeds
- Metals and minerals: Iron ore, steel, aluminum, zinc, tin
- Precious metals: platinum, palladium, silver, and gold
- Energy: Natural gas, Brent crude, crude oil, thermal coal
- Services: Energy services, mining services, etc
Each of these commodities, like stocks, is traded on multiple exchanges. National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India (MCX), Universal Commodity Exchange, and National Multi Commodity Exchange of India are among these exchanges.
How to start commodity trading
The Forward Markets Commission controls a total of 22 commodity exchanges in India.
To begin trading in commodities, you'll need a bank account to use for transactions, as all trading is now done online. Second, in order to trade on exchanges like NCDEX, one must have a separate commodity Demat account with the National Securities Depository Limited.
The Demat account functions similarly to a bank account in that it records all of your transactions and saves your commodity holdings, as well as their futures and options.
Futures are a popular way to trade commodities. A future is similar to a contract in which two parties agree to deliver/pay on agreed-upon terms at a future date. This contract allows you to bet on the commodity's price and profit if the price moves in the direction of the agreed-upon price in the future.
Types of commodity futures settlement
To be able to perform these transactions, you will need to trade through a broker. There are a number of brokers in the business, and some prominent brands, such as Dealmoney Securities, also allow you to trade straight online through their interface.
The transactions are completed electronically, and there is no monetary settlement. However, commodities transactions can be of two types:
– Delivery based
– Cash settlement based
If you're buying or selling futures of a particular commodity, you'll have to supply/receive the units of the commodity after the contract expires under-delivery based. You can simply choose to settle the gains/losses in cash rather than taking delivery in cash-settled mode.
Commodity trading is not difficult, but it is important to consult an experienced broker before entering the market. Simultaneously, it is critical to understand the types of commodities, contracts, and other factors before investing. A smart approach combined with in-depth market knowledge will go a long way toward making your investment worthwhile.