What is Commodity Trading in India? – How to Trade Commodities?

Buying and selling commodities (cotton, maize, gold, silver, crude oil, etc.) through a commodity exchange is called commodity trading. Commodity trading is mostly done via futures & options contracts.

Chana, turmeric, coriander, corn, maize, sugar, and edible oil – a trip down the kitchen lane! You may have bought such commodities from your neighborhood market. But how about trading in such commodities the way you do in stocks? Exciting, isn’t it?

Commodity trading in India is quite popular. You can buy and sell agricultural commodities like turmeric, coriander, or precious metals like gold and silver in a virtual commodity market. 

Sounds interesting, right? We have covered all the commodity trading basics in detail. 

Content

• Commodity Meaning
• Commodity Trading Meaning
• Types of Commodities/List of Commodities
• Commodity Exchange
• How to Trade Commodities
• Advantages of Commodity Trading
• Disadvantages of Commodity Trading
• Commodity Trading Time
• Commodity Trade Classification
• Top Commodities Broker in India
• Quick Summary

Commodity Meaning

A commodity is anything that is tangible and is essential to daily life essential. It is a raw material that can be exchanged for trade purposes. Things like vegetables, grains, sugar, edible oil, metals, etc., are classified as commodities. These can be bought and sold in a physical or a virtual market. 

Commodity Trading Meaning 

When you buy and sell commodities through commodity exchange, it is called commodity trading. It mostly happens in derivative products or commodities. How you can trade in commodities is covered later in the article. Also, get to know how to open a commodity account in easy steps here!

Commodity trading is mostly done via futures & options contracts.

Learn about different forms of online trading. Click on the links provided below to read about them in detail.

Types of Commodities/List of Commodities

Commodities can be classified into five major categories, and they are traded on several dedicated exchanges, such as Multi Commodity Exchange (MCX), the most popular one. If you are dusty about what is MCX? we’ve got you covered! 

Click here to learn everything about MCX.

• Agriculture: These include all the agricultural products like corn, maize, sugar, edible oil, etc.
• Energy: Energy commodities consist of crude oil, natural gas, etc.
• Base Metals: Iron, copper, brass, lead, zinc, mica, etc., most of the metals that are found in nature get traded as commodities.
• Bullion: Gold and silver are also traded on commodity exchanges.
• Meat and livestock: Cattle, egg, pork, etc., fall in this category.

Here are some other commodities:

Aluminium, Brass, Copper, Zinc, Lead, Nickel, Gold, Silver, Rubber, Black Pepper, Mentha Oil, Crude Palm Oil, Palmolien, Cardamom, Cotton, Castor Seed, Natural Gas, Crude Oil, Cotton, Guar Gum, Guar Seed, Kappas, Crude Palm Oil, Cotton Seed Oil Cake, Castor Seed, Mustard Seed, Refined Soy Oil, Soybean, Sugar, Wheat, Barley, Paddy, Chana, Maize Rabi, Maize, Jeera, Turmeric, Coriander, Pepper.

Commodity Exchange

Commodity exchanges function in a similar fashion as the Bombay Stock Exchange and the National Stock Exchange. They facilitate commodity trading between buyers and sellers and are regulated by The Commodity Derivatives Market Regulation Department (CDMRD) of the SEBI. 

In India, the commodities are traded on Multi Commodity Exchange (MCX). Some other commodity exchanges include: 

1. National Commodity and Derivatives Exchange – NCDEX
2. Indian Commodity Exchange – ICEX
3. National Multi Commodity Exchange – NMCE
4. Ace Derivatives Exchange – ACE
5. The Universal Commodity Exchange – UCX

How to Trade Commodities?

You must be curious by now about how to invest in commodities. But before jumping into it, let’s get your basics right about commodity trading. 

Commodity trading in India is executed via derivative contracts like commodity futures and options. Commodity futures are a contract that allows an investor to buy or sell a commodity at a set price in the future. Futures are available for every category of commodities. A futures contract is an agreement between two parties who wish to secure the position of the commodity they are trading in regardless of the market volatility.

Commodity trading is very similar to that of stock trading. Just like BSE and NSE, MCX has its brokers who offer commodities to investors for trading. Commodity trading is done in lots. Just like you buy or sell X number of shares of a company on BSE or NSE, here you buy a barrel of oil or bale of cotton and a kilogram of sugar. When the futures contract matures, you can either take the physical delivery of the product or cash, whichever is specified in the contract.

Advantages of Commodity Trading 

• Commodity trading is very transparent, and price manipulation is very unlikely.
• It provides protection against inflation or sudden price fluctuation.
• It can help one hedge prices against an unforeseen event that may influence the prices to skyrocket or nosedive.
• Investing in commodities brings diversification to the portfolio and helps in avoiding over-exposure to shares.
• Since the margin required is low, traders can use it to hedge their positions. Hedging is one of the most important advantages that commodity trading offers. Click here to learn about what is hedging in the stock market.

Disadvantages of Commodity Trading 

• Sometimes, commodities get volatile, and a wrong trade can result in heavy losses.
• Any major event can make the market go berserk, thereby inflicting losses.

Commodity Trade Timing

MCX trades from 9 am to 11:30 pm, Monday to Friday – November to March (During daylight saving time). This extends up to 11:55 pm after daylight saving time, typically between every November and March of the following year. 

Agriculture commodities trade from 9 am to 5 pm. When it comes to commodities such as metals, energy, and bullion, they trade till 11:30 pm.

As per MCX’s Circular no.: MCX/TRD/574/2022, it is hereby informed that Commodity Trade Timings at MCX will be revised from 7th November 2022 to 10th March 2023 (including both days) due to US Daylight Savings in Fall Season.

The revised timings are mentioned in the table below.

Commodity Trade Classification

As a commodity market participant, you need to select one of the trader categories that suits your profile as you sign up on a broker’s platform. This is because SEBI requires commodity exchanges to classify all commodity traders into various categories.

The different trader categories include:

1. Farmers/FPOs: Farmers, farmers’ cooperatives, Farmers’ Producers Organizations (FPOs), and other entities of similar nature
2. Value Chain Participants (VCPs): Processors, Commercial users such as Dal and Flour Millers, Importers, Exporters, Physical Market Traders, Stockists, Cash & Carry participants, Produces, SMEs/MSMEs, Wholesalers, etc. but exclude farmers/FPOs. 
3. Proprietary Traders: The members of stock exchanges trading in their proprietary accounts.
4. Domestic Financial Institutional Investors: Mutual Funds (MFs), Portfolio Managers, Alternative Investment Funds (AIFs), Banks, Insurance Companies, Pension Funds, etc., which are allowed to trade in commodity derivatives. 
5. Foreign Participants: Eligible Foreign Entities (EFE), NRIs, etc., which are allowed to trade in commodity derivatives markets. 
6. Others: All other participants that could not be classified in the above categories. 

Although the categorization happens on a self-declaration basis, the exchanges can re-classify any participant if deemed necessary.

Top Commodities Broker in India

Picking on the right broker for commodity trading is a crucial choice to make. We can’t talk about others, but we can definitely tell you what makes us the right choice!!

There are tons of reasons why Alice Blue will be a better option for commodity trading. Alice Blue offers a single margin account, which allows the trader to trade in all the major exchanges, i.e., BSE, NSE, MCX, and CD (Currency Derivatives) in one place.

Alice Blue is a multi-award-winning brokerage firm by MCX & NSE and is also known for its LOWEST BROKERAGE of ₹ 15 for Intraday and F&O. 

If you have not yet opened a Commodity account, now is your opportunity to take the first step toward financial freedom!

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:

Quick Summary

• Taking about commodity meaning; a commodity is anything that is tangible and is a daily life essential. Things like vegetables, grains, sugar, edible oil, metals, etc., are classified as commodities.
• Buying and selling of commodities (cotton, maize, gold, silver, crude oil, etc.) through a commodity exchange is called commodity trading. Commodity trading is mostly done via futures & options contracts.
• There are five types of commodities:
  • Agriculture: These include all the agricultural products like corn, maize, sugar, edible oil, etc.
  • Energy: Energy commodities consist of crude oil, natural gas, etc.
  • Base Metals: Iron, copper, brass, lead, zinc, mica, etc., most of the metals that are found in nature get traded as commodities.
  • Bullion: Gold and silver are also traded on commodity exchanges.
  • Meat and livestock: Cattle, egg, pork, etc., fall in this category.
• Coming to the advantages of Commodity trading; it is simpler than stock trading as fundamental analysis is not involved. 
• Commodity prices fluctuate on the principle of demand and supply.
• Trade in commodities to diversify your portfolio.
• There are also certain disadvantages of commodity trading; as sometimes, commodities get volatile, and a wrong trade can result in heavy losses.
• Any major event can make the market go berserk, thereby inflicting losses.
• Trading times for Precious Metal, Base Metal, and Energy Commodities is: 
  • 9.00 am to 11.30 pm – March to November (During daylight savings time)
  • 9.00 am to 11.55 pm – November to March
• For Agri commodities like (Cotton, KAPAS, and CPO), the timing is 9.00 am to 9.00 pm. 
• All other Agri commodities 9.00 am to 5.00 pm.