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How Does Commodity Market Work?

Nov-11-2019Blog by – Mr. Ashish AjmeraRead Time: 2 Min.Word Count: 526140 How Does Commodity Market Work?

Commodity market is one of the most popular forms of trading in India and across the world. Commodity trading market refers to buying and selling of metals, bullion, agricultural products such as spices, food grains and pulses, livestock, energy, oil and oilseeds, plantations and many other such commodities.

The commodity market in India falls under the regulation of the Securities and Exchange Board of India (SEBI). There are 24 commodity exchanges in India, but the major ones are Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX), National Multi Commodity Exchange (NMCE), Indian Commodity Exchange (ICEX), Ace Derivatives Exchange (ACE) and Universal Commodity Exchange (UCX).

How to Trade on Commodity Market?

Investment in commodities can be made by holding it in a physical form or electronically through Exchange Traded Funds (ETFs) or dematerialization (Demat) account. You can easily open a trading account with commodity brokers registered with SEBI.

The ideal way to invest in commodities is through a futures contract. It is an agreement to buy or sell a specific quantity of commodities at a predetermined price at a future date. Futures contract minimize the risk of price fluctuations that may occur in future. Futures contract trading of commodities is a good option if you are an amateur investor. When you buy commodities throughthe futures contract, you are required to pay a fixed percentage of the cost called margin. The margin amount is usually 5-10% of the contract value. You can start with commodity trading with a minimum of Rs 5000.

You can also through an option contract, but only in gold, silver, copper, zinc and crude oil on MCX and soya refined oil, soya bean, chana, guargum and guarseed on NCDEX. An options contract is one where the option buyer has the right, not the obligation, to buy or sell the commodity. The option buyer is required to pay the price called option premium to the seller for owning this right.

If you are holding commodities in a physical form, then do ensure that they are maintained in the trading exchange’s authorized warehouse and you get a receipt for it. If you are stocking the commodities in

If you want to hold commodities in a Demat account, you can avail it from National Spot Exchange Limited (NSEL). However, do note that you can trade only in gold, silver, copper, zinc, lead, platinum and nickel through a Demat account.

The prices of commodities depend on a number of factors such as demand-supply, inflation, currency fluctuations, global prices and trends, weather, import-export conditions, government policies, etc. Hence, the volatility of commodities market is higher than the regular equity market. However, you can minimize your risks considerably by familiarizing yourself with the workings of commodities market and keeping yourself updated with the prices and trends on a daily basis. Or still better and advisable, you should seek professional commodity broker services.

Brokers have complete knowledge of commodity markets and can guide you aptly on investment advisory services to meet your financial goals. Choose a broker who has a good reputation in the market, has a reliable and proactive support team, and offer you numerous commodity trading options.

Also Read: Commodity Markets: Myths v/s Reality

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