A commodity can be termed as an asset or a good that is essential in everyday use. Some examples of commodities include food, metals, and energy. By nature, commodities are interchangeable and alternate. It is an object that one can buy or sell, except for money and actionable claims.
Published on 22 March 2023
Trading commodities was common in India even before being introduced in a lot of other countries worldwide. But a host of unfortunate incidents like natural calamities, invasions, and government policies led to a decrease in commodity trading. But, today, although there are several different forms of trading like stock market trading, commodity trading has become increasingly important.
Let us understand the commodity trading basics to give you an insight into the commodity market in India.
Commodity trading refers to the selling, buying, and trading of commodities. The underlying commodities traded include crude oil, wheat, natural gas, etc.
The 6 main commodity trading exchanges in the country are listed below:
Generally, there are 4 major groups in which commodities can be classified:
One of the best ways in which you can trade commodities is by a futures contract. It is a contract to sell or buy any commodity at a later date at a predetermined price. Futures contracts can be availed on all types of commodities. These contracts are used by traders to prevent the risks that come with price swings of an indirect trade of futures for raw materials or goods.
As an investor, you can take part in the price fluctuations in commodities. You can trade in commodities without investing directly in a futures contract with the help of Exchange Traded Notes (ETN), and Exchange Traded Funds (ETF).
With the use of a futures contract, a group of commodities or a single commodity constitutes an index. Commodity ETFs are mostly used to keep track of the prices of these indexes. However, to give an impression of fluctuations in commodity index or price backed by the issuer, ETNs come into use. ETNs are a type of unsecured debt. Moreover, for investing in ETNs and ETFs, you do not need to have any specific brokerage account.
Directly investing in mutual funds is quite improbable in commodity trading. Instead, you can invest in stocks of firms involved in industries related to commodities. These industries include energy, mining, food processing, and metals.
The risk factor is higher when you invest in stocks of any such companies, especially company-related risk factors. On the other hand, investing in a limited number of commodity mutual funds in a futures contract will provide you with direct exposure to the prices of commodities. Although the fees of managing such mutual funds are high and there is a lack of fair play when it comes to these stocks, you can benefit from the investment. These advantages include proper management of money, liquidity, and diversification of portfolios.
When the Multi-Commodity Exchange (MCX) facilitates the trading of commodities in the commodity market in India, it is called MCX trading. Like NSE and BSE give investors a platform for trading in stocks, the MCX is a platform for investors to trade in commodities.
A broker who is registered with the MCX acts as an intermediary between the investors and the commodity exchange. You can trade in energy, metal, and food commodities in the MCX. The Multi-Commodity Exchange follows the rules and regulations of the Securities and Exchange Board of India (SEBI).
Thus, commodity trading in India has become quite popular, and you can also use various ways to invest in commodities. While investing in commodities, ensure that you choose the right broker so that you have a good experience of investment. Also, research, study the market, and then invest in commodities so that you can earn profits.