December 15, 2023

Commodity Trading in India

Commodity Trading in India

In India, “commodity trading” refers to buying, selling, and trading in various commodities on commodity exchanges. These commodities include gold, silver, crude oil, agricultural goods, and others. This trading can be done in the spot market, where commodities are bought and sold for immediate delivery, or in the futures market, where commodities are bought and sold for delivery at a future date.

Contents:

What Is Commodity In Share Market?

A commodity in the share market refers to a basic good or raw material that is interchangeable with other commodities of the same type. These commodities are typically used as inputs in producing various goods or services. The value of a commodity is subject to supply and demand dynamics, with changes in these factors influencing the commodity’s price.

Let’s consider an example from an investor’s point of view. Suppose Ms. Patel, an investor, purchases gold as an investment. Gold, in this case, is treated as a commodity, and she can buy and sell it on a commodity exchange, similar to how shares are traded on a stock exchange. If there is a surge in demand for gold, but the supply remains limited, the price of gold will increase, allowing Ms. Patel to sell her gold holdings at a higher price and potentially earn a profit on her investment.

What Is Meant By Commodity Trading?

Commodity trading in the futures market involves buying or selling contracts for the future delivery of commodities. In the futures market, commodity traders use futures contracts as financial instruments to speculate on the future price movements of commodities. These contracts provide opportunities for investors to take both long (buy) and short (sell) positions on commodities, enabling them to profit from price increases or declines, respectively. Moreover, futures trading allows businesses involved in commodity production or consumption to hedge against potential price risks, ensuring stability in their operations and planning.

For example, let’s say that a coffee producer expects the price of coffee beans to decrease due to a bumper crop season. To safeguard against potential losses, the producer sells coffee futures contracts for future delivery at the current market price. If the coffee prices do fall as anticipated, the producer can buy back the contracts at a lower price before their expiration date, effectively locking in the higher selling price and mitigating losses from the actual decline in coffee prices. In this way, the coffee producer uses the futures market to hedge against adverse price movements, ensuring greater stability in their business operations.

What Is Commodity Exchange?

A commodity exchange is a regulated market where various commodities and their derivatives are traded. These exchanges ensure fair trade practices, providing a platform for buyers and sellers to engage in trading activities under a set of standardized procedures.

Let’s consider the example of the Multi Commodity Exchange of India (MCX), one of the largest commodity exchanges in the country. It provides a platform for trading commodities like gold, silver, crude oil, and agricultural commodities. 

Types Of Commodities

Commodities traded in markets broadly fall into four categories: Agricultural Commodities (e.g., wheat, sugar, cotton), Energy Commodities (like crude oil, natural gas), Metals (including precious metals like gold and silver as well as industrial ones like copper, zinc), and Livestock and Meat (including live animals and meat products).

  1. Agricultural Commodities: This includes wheat, sugar, cotton, and other farm produce.
  2. Energy Commodities: This involves energy sources like crude oil, natural gas, and gasoline.
  3. Metals: This refers to precious metals such as gold, silver and industrial metals like copper, zinc.
  4. Livestock and Meat: This category involves live animals (like cattle) and meat products.

Advantages of Commodity Trading

Commodity trading offers an excellent opportunity for diversification. Since commodities typically have a low correlation with stocks and bonds, they can help reduce the overall risk of an investment portfolio.

Here are some of the benefits of commodity trading:

  • Diversification: Commodities provide a great way to diversify a portfolio and reduce risk. For example, when the stock market performs poorly, commodities like gold often do well, balancing the portfolio’s performance.
  • Hedge against Inflation: Commodities often serve as a hedge against inflation. As commodity prices typically rise with inflation, investing in commodities can protect the purchasing power of your money.
  • High Return Potential: Commodity trading can yield high returns, especially during periods of high market volatility. However, it’s essential to remember that high returns also come with high risks.
  • Global Demand Influence: Global macroeconomic factors influence commodity prices. For example, an increase in construction activity can lead to a rise in the demand for steel, driving up its price on the commodity market.

Disadvantages Of Commodity Trading

Commodity trading involves high volatility due to factors like weather conditions and geopolitical events. Furthermore, the risk of speculation can lead to financial losses, and physical storage and delivery of certain commodities can add logistical challenges and costs.

  • High Volatility: Commodity prices can be highly volatile, influenced by various factors like weather conditions, geopolitical events, and global economic trends. This volatility can lead to significant losses.
  • Risk of Speculation: Commodity markets often attract speculators, leading to price bubbles and crashes. This speculative nature can result in substantial financial losses.
  • Physical Storage and Delivery: For certain commodities, physical storage, and delivery can pose logistical challenges and additional costs. However, most traders bypass this issue by engaging in futures contracts where physical delivery is rare.

Commodity Trading Strategy

Commodity trading strategies include trend following, where trades are based on identified price trends; range trading, which involves making decisions based on a commodity’s identified price range; breakout trading, which relies on key price levels that can result in significant price movement; and news-based trading, where trades are informed by news events likely to impact a commodity’s price.

Some common commodity trading strategies include:

  • Trend Following: This strategy involves identifying a trend in the commodity price and making trades based on the assumption that the trend will continue.
  • Range Trading: In this strategy, the trader identifies a price range within which a commodity trades and makes buy and sell decisions based on this range.
  • Breakout Trading: Here, the trader identifies key levels that, if broken, are likely to result in significant price movement. They then place trades based on these ‘breakout’ levels.
  • News-based Trading: This strategy involves making trades based on news events that are likely to affect the price of a specific commodity.

Commodity Trading Time In India

In India, commodity trading takes place at set times. Monday through Saturday, these time slots are split into a morning session and an evening session. 

  • Morning Session: The morning session runs from 9:00 AM to 11:30 AM, Monday through Saturday.
  • Evening Session: The evening session runs from 5:00 PM to 11:30 PM, Monday through Friday. The evening session is only applicable on holidays.

Trading Holidays for 2023 for the Commodity Trading

S.No.HolidaysDateDayMorning SessionEvening Session*
1.Republic DayJanuary 26, 2023ThursdayClosedClosed
2.HoliMarch 08, 2023WednesdayClosedOpen
3.Ram NavamiMarch 30, 2023ThursdayClosedClosed
4.Mahavir JayantiApril 04, 2023TuesdayClosedOpen
5.Good FridayApril 07, 2023FridayClosedClosed
6.Dr.Baba Saheb Ambedkar JayantiApril 14, 2023FridayClosedClosed
7.Maharashtra DayMay 01, 2023MondayClosedOpen
8.Id-Ul-Adha (Bakri Id)June 29, 2023ThursdayClosedOpen
9.Independence DayAugust 15, 2023TuesdayClosedClosed
10.Ganesh ChaturthiSeptember 19, 2023TuesdayClosedOpen
11.Mahatma Gandhi JayantiOctober 02, 2023MondayClosedClosed
12.DussheraOctober 24, 2023TuesdayClosedOpen
13.Diwali BalipratipadaNovember 14, 2023TuesdayClosedOpen
14.Gurunanak JayantiNovember 27, 2023MondayClosedOpen
15.ChristmasDecember 25, 2023MondayClosedClosed
  • Morning session – 10:00 AM to 5:00 PM
  • Evening session – 5:00 PM to 11:30/ 11:55 PM
  • On November 12, 2023, Muhurat Trading will take place. The exact times for Muhurat Trading will be announced later.
  • 5:00 PM to 9:00 PM/9:30 PM for agricultural commodities with global links
  • In addition to the aforementioned holidays, some others take place on Saturdays and Sundays. We left these two days off of the above holiday list because they are weekly holidays.

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:

  • Farmers/FPOs: Farmers, farmers’ cooperatives, Farmers’ Producers Organizations (FPOs), and other entities of similar nature
  • 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. 
  • Proprietary Traders: The members of stock exchanges trading in their proprietary accounts.
  • Domestic Financial Institutional Investors: Mutual Funds (MFs), Portfolio Managers, Alternative Investment Funds (AIFs), Banks, Insurance Companies, Pension Funds, etc., can trade in commodity derivatives. 
  • Foreign Participants: Eligible Foreign Entities (EFE), NRIs, etc., allowed to trade in commodity derivatives markets. 
  • Others: All other participants 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 necessary.

How To Do Commodity Trading?

Commodity trading in India follows a straightforward process. Here are the steps you need to take:

  • Open a Trading Account: The first step in commodity trading is to open a trading account with a registered broker like Alice Blue. This will give you access to the commodity exchange where you can carry out transactions. 
  • Understand the Market: Before diving into trading, it’s important to gain a comprehensive understanding of the commodity markets, the factors influencing them, price fluctuations, and more. You can leverage educational resources, online forums, and market analysis tools for this purpose.
  • Choose Your Commodity: Based on your understanding, market trends, and personal preferences, choose the commodity you want to trade in. For instance, if you’ve been following the crude oil market closely and understand its dynamics, you might choose to trade in oil futures.
  • Develop a Trading Strategy: This involves deciding when to buy, when to sell, and at what price. This decision should be driven by market analysis and not mere speculation. For example, you might decide to buy gold futures when you anticipate a rise in gold prices due to global uncertainties.
  • Start Trading: Once you’ve done the above, you can start placing orders through your trading account. You can place market orders (buy/sell at the best available price) or limit orders (buy/sell at a specific price or better).

Remember, commodity trading, like any other form of trading, carries risk, and it’s important only to invest money you can afford to lose.

List Of Commodities Traded In India

In India, commodities are traded across various sectors: Precious Metals such as Gold and Silver; Energy sources like Crude Oil and Natural Gas; Base Metals including Copper and Zinc; Agri-Commodities such as Wheat and Cotton. And other commodities like Rubber and Palm Oil.

  • Precious Metals: Gold, Silver, Platinum
  • Energy: Crude Oil, Natural Gas
  • Base Metals: Copper, Zinc, Aluminium, Nickel, Lead
  • Agri-Commodities: Wheat, Corn, Soybean, Cotton, Sugar, Spices
  • Others: Rubber, Wool, Palm Oil

What Is Meant By Commodity Trading?- Quick Summary

  • Commodity trading in India refers to the buying, selling, and trading commodities like gold, silver, oil, and agricultural products on regulated commodity exchanges.
  • A commodity exchange is a legal platform where commodities and derivative products are traded.
  • Commodity trading has several advantages like portfolio diversification, hedging against inflation, and high potential returns.
  • However, it also has disadvantages like high volatility, requirement of technical knowledge, and potential for significant losses.
  • A wide range of commodities are traded in India, including precious metals like gold and silver, energy commodities like crude oil and natural gas, base metals, and various agricultural commodities.
  • Start your investment journey with Alice Blue. Trade commodities at just ₹ 15/order. 

Commodity Trading In India – FAQs

What is meant by commodity trading?

Commodity trading is the buying and selling raw materials or primary products on the commodity markets. It can include grains, gold, oil, natural gas, and more. For instance, an individual might buy gold when prices are low and sell when prices increase, thus making a profit.

What is an example of commodity trading?

An example of commodity trading could be the trading of crude oil futures. Suppose a trader anticipates that the price of crude oil will rise in the next two months due to global demand. They could buy a futures contract at the current price and sell it later at a higher price when their prediction comes true.

Which commodity is best for trading?

The “best” commodity for trading depends on the trader’s knowledge, risk tolerance, and market conditions. For example, gold is considered a safe haven during economic uncertainties, while agri-commodities like wheat or soybean can be attractive to those who understand the agricultural sector.

What are the 3 types of commodities?

The three main types of commodities traded in the markets are:

  • Agricultural commodities (e.g., wheat, rice, coffee, sugar)
  • Energy commodities (e.g., crude oil, natural gas)
  • Metal commodities (e.g., gold, silver, copper)

Can commodity traders make money?

Yes, commodity traders can make money, but like any form of trading, it involves risk. Success in commodity trading requires a solid understanding of market dynamics, careful risk management, and a well-thought-out trading strategy.

 Is Commodity Trading Profitable?

Commodity trading can be profitable, but it also comes with high risks. Market volatility, geopolitical events, and natural disasters can all greatly impact commodity prices. Therefore, it’s advisable for traders to be well-informed and use risk management techniques.

Is commodity trading safe?

Commodity trading, like all forms of trading, carries risks. Prices can fluctuate rapidly due to supply and demand dynamics, geopolitical tensions, or economic indicators. Therefore, it’s essential to understand these risks and to trade responsibly.

How do I start trading commodities?

Starting to trade commodities involves a few key steps:

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