How Commodity Trading Works? | My Espresso

How Commodity Market Works in India?

Do you want to know how the commodity market works in India? This is a complex question, but we will do our best to answer it. The first thing to understand is that there are different types of commodities. Some examples include metals, agricultural products, and energy products. Each commodity has its unique characteristics and behaves differently in the market. In India, the commodity market is regulated by the Securities and Exchange Board of India (SEBI).

Published on 31 January 2023

The commodity market in India is a platform where buyers and sellers trade various commodities. It is an integral part of the Indian economy and plays a significant role in the country's agriculture sector. This blog post will discuss how commodity market works in India.

Let's get started.

Trading in Commodities

Commodities trading is a prevalent form of investing in India. It involves the buying and selling of various commodities, such as gold, grains, oil or even currencies. In commodity trading, investors purchase a certain amount of a commodity with the expectation that its price will increase in the future and they can resell it for a profit.

Types of Commodities Traded in India

The Securities and Exchange Board of India (SEBI) regulates commodity trading in India. In India, commodities are traded on commodity exchanges such as Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX) and Indian Commodity Exchange (ICEX). The commodities traded in India include agricultural products like wheat, rice, pulses, spices, oil seeds etc.

The non-agricultural products include metals like gold, silver, and copper; energy commodities such as crude oil and natural gas; bullion like gold coins or bars; currency pairs and other financial derivatives.

How Does the Commodity Market Work in India?

The commodity market works much like any other. In India, individuals and businesses buy and sell goods for a profit. People take advantage of the fluctuations in commodity prices to profit from their investments.

In commodity trading, there are two contracts: futures and options. A futures contract is an agreement that requires a trader to purchase or sell a commodity at a pre-determined price on a future date. Options contracts give traders the right but not the obligation to buy or sell a particular commodity at an agreed-upon price within a certain period.

To be involved in commodities trading in India, you must have a Demat account with authorized members called brokers registered with the Securities Exchange Board of India (SEBI). With this account, you'll be able to buy and sell commodities and take advantage of other features, such as leverage trading.

In India, commodity trading is regulated by the Forward Markets Commission (FMC). The FMC ensures that all commodity transactions are conducted fairly and that traders have access to all necessary information, including the commodity's price, how much it costs to purchase or sell, and how long they have until the contract expires.

What Conditions Must One Meet to Participate in the Market for Commodities Derivatives in India?

The only way to trade in commodities derivatives is via a stockbroker registered with SEBI. The actions listed below can be done to begin trading for this purpose:

  • Selecting a broker, establishing a trading account with such a stockbroker registered with SEBI, and finishing the Know Your Client procedure (KYC)
  • Understanding the Risk Disclosure Document's elements (RDD)
  • The Stockbroker issuing a Unique Client Code (UCC)
  • Making the necessary Margin Deposit with the Broker
  • Creating a bank account for the receiving and transfer of cash
  • Only deposit the required margin into the bank and then request a receipt.
  • Create an account with the Repository to speed up delivery

Benefits of the Commodity Trading Market in India

There are various benefits of the commodity trading market in India. Mentioned below are a few of these benefits:

  1. Low Capital Investment: The commodity market does not require a large amount of capital to start trading. This makes it ideal for those who want to invest small amounts and still reap the benefits of trading in commodities.
  2. High Liquidity: Commodities are highly liquid due to their nature, which means that they can be easily bought or sold at any point in time as opposed to other investment options like mutual funds or stocks. This makes them an excellent option for investors who need quick access to their money without waiting too long.
  3. Price Volatility: Price volatility is one of the major benefits of the commodity markets in India. Prices of commodities can fluctuate significantly depending on various factors, such as supply and demand. This makes it easy for investors to make profits when the prices rise and losses when they fall.

The Bottom Line

The commodity market in India is an important part of the Indian economy, offering investors various ways to speculate and hedge their portfolios. With the right knowledge and tools, traders can take advantage of the many benefits provided by commodity trading in India.

Chandresh Khona
Team Espresso

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