What Is The Meaning Of Commodity Trading : How To Trade and Types of Commodities

Commodity trading is generally referred to as MCX market. It is a physical or online market for exchange of commodities. There are more than 50 commodities markets across the globe who transact in more than 100 primary commodities till date. Since 2015b SEBI regulated the commodity derivative trading market. Before the SEBI, the Ministry of Consumer affairs looked after it.

Types of Commodities

The commodities are basically split up into two types. They are :

• Hard commodities
• Soft commodities

Hard Commodities

They are basically the natural resources that need to be extracted from the core of Earth. The very well known examples for the same are : Gold, Oil etc.

Soft Commodities

They are basic necessities for the agricultural industry and are also essential for daily lives of humans. To sum up they are a part of livestock for humans. They are : Corn, Wheat, Coffee etc.

Further looking into sub-division commodities are classified into :

1. METALS
2. ENERGY
3. AGRICULTURE
4. LIVESTOCK

Metals include Gold, Silver etc. Energy includes Natural Gas, Crude Oil and other energy resources. The agriculture involves beans, corn, wheat etc. and livestock includes elements such as cattle.

How to Invest into Commodity Trading ?

One can be involved in commodity trading in a direct or an indirect manner. The ways to Invest into commodities are as follows :

• Companies
• Mutual funds
• ETFs (exchange traded funds)
• Self trading

In a commodity market the hard and soft commodities are traded openly and buying or selling of them happens at every second. The trading is more in volume in the virtual market. Investors involve themselves into commodity trading by gathering shares of either the companies who are exposed to commodity market gains or by individually trading in the open market by the utilization of futures contracts. Another way to invest into such commodities is to invest in mutual funds and ETFs who are involved in commodity trading.

However the best way to get involved into commodity trading is by opting for self trading and future contracts. Future contract is an agreement between buyer and seller for exchange of commodities with a pre-decided quantity and set price before the transaction. Traders often use this to avoid the hit from swings in the indirect market for goods or material. It is highly risky to trade into commodities given the huge amount of capital invested and the swings in prices. Also the minimum lot size per commodity is quite high in comparison to lot size in stock futures.

Commodity Exchanges in India

The major commodity trading exchanges functioning is India are as follows :

• MCX (Multi commodity exchange)
• NCDEX (National commodity and derivative exchange)
• UCX (The universal commodity exchange)
• ACE (Ace derivative exchange)
• ICEX (Indian commodity exchange)
• NMCE (National multi commodity exchange)

Steps for Trading in Commodity Market :

First of all you need to open a DEMAT account with the right to access the commodity trading as well. Then follow the steps below :

• Choose your commodity : Among hundreds of commodities you should focus on one or two commodities at a time to keep an actual track of the price movements and to anticipate the chances for trading whenever they arrive. The best commodities to start with are Gold and Crude oil.

 

• Execution of Trade : On the trading platform you can visit the price movements. Based on that try to buy or short the commodity. This is similar to buying or selling of shares. There are very less distinguishing factors between both of them.

 

• Managing your risk : While trading make sure you are under your risk limit and that you have a stop loss point in mind. Once that triggers it’s the best thing to get out of the tyrade. Also it is seen that Algorithmic trading provides better results than manual trading in many scenarios.

 

• Closing and Monitoring Position : If you opt for Algo Trading it is not necessary to keep a constant track on your position. If you opt for manual trading it is mandatory to have constant vision on the price movements as the fluctuations in prices are major many times. Once you get a return of 10% – 15% exit the trade. The average profit margin should be 5% – 8%.

The commodity markets open on 10 A.M. –  11.30 P.M. from Mon to Fri.

Which Commodities to OPT for in Initial Phase ?

Crude is the one of the most important Natural resource on the face of Earth. It is the main product for major products that we utilize in daily lives. Petroleum and plastics and the major two examples of the same. Hence the prices of Crude Oil cannot fluctuate or go down until a major economy of the world together takes a brutal hit. The chances of both of them happening are very rare.

In case of Gold it is the most safest asset on the face of Earth. It is kept as a reserve in treasuries against printing new currency. Hence when the economies suffer from a blow the gold prices tend to go up. Even when rates of inflation go up the gold prices boost up. Hence Gold is the safest asset for increasing the value of investment in the long run.

By trading in both these commodities one can learn the commodity market and also gets chances to revive if the rare case of economic failure arises.

Hence one should opt for trading into gold and crude oil in the initial phase of commodity trading.

Pros of Commodity Trading

• They are highly leveraged markets. Hence one can earn pretty much well if the strategy turns out to be good. The reason is transactions involves more quantity.
• They are highly liquid markets and hence one gets the chance to recover if the individual is stuck in one trade. It’s always said that, “Swinging is the basic characteristic of Futures market.”
• If traded with proper strategies they generate high amounts of profits in comparison to equity markets and mutual funds.
• It is a controlled market so the chances to get cheated are very less. Also it is affordable to trade in commodities given the minimum deposit criteria.

Cons of Commodity Trading

• They are highly volatile hence one can lose huge amounts of money within a night’s sleep.
• Direct investment is very risky as it only gives the investors a chance to have one commodity in their portfolio. The balancing is not possible. Hence new investors shall opt for Mutual funds or companies or ETFs for entering into the commodity market.
• The chances for gains and losses are equal as the leverage is high and movements is constant. Hence leverage plays a very important role in this market. If the margin is used properly it can deliver significant returns. The ideal margin is 5 – 10 % of the entire investment. Hence one has to only give 5000 – 10000 Rs as deposit for trading commodities worth 50000 – 1 lakh Rs.
• The position squaring is very important due to the unpredictable market movements in a short span of time.

MCX Trading

It is the most used exchange platform for commodity trading. MCX gives an exchange platform which is similar to BSE and NSE. An MCX broker is the intermediary between the buyer and seller . MCX works under the FMC rules and regulations by SEBI (2015).  It allows trading in metals, agricultural commodities and energy. Most contracts in the commodity market take place through MCX platform.