How to Start Commodity Trading in 5 Simple Steps
Commodities, such as agricultural products, minerals, oil and fossil fuels, are raw materials needed to make finished items. They are tangible products that are purchased, sold and exchanged in financial markets, as opposed to securities, such as stocks and bonds, which are purely financial contracts.
In addition to traditional securities, commodities can help investors diversify their portfolios. A few examples of the most traded commodities include seeds, metals, livestock, oil, precious metals and natural gas.
If you want to know the types of commodities and how to start commodity trading, here is a quick guide for your help.
What is Commodity Trading?
Commodity trading refers to the buying and selling of commodities and derivatives in a commodity market. Metal, energy, livestock, meat and agriculture are some of the most traded commodities in India.
MCX (Multi Commodity Exchange of India Ltd), one of India's prime national commodity exchanges, offers investors to trade in commodities, allowing them to expand their portfolios beyond traditional securities (such as shares and bonds). Similar to stocks and bonds, you can also trade commodities online.
Types of Commodities
The following are types of commodities that you can buy or sell in India:
- Agricultural products (such as soya bean, chana, jeera, rice, rubber, etc.)
- Metals (such as industrial metals like copper, aluminium and lead, and precious metals like gold and silver)
- Energy (like crude oil, coal, natural gas). Renewable energy sources, such as wind and solar power, are also included in energy.
- Livestock refers to live animals, including cattle, etc.
5 Simple Steps to Start Commodity Trading
Before beginning to trade commodities online, as a trader, you should get a thorough understanding of markets, commodities and the economic factors that influence commodity prices. Then, to make an appropriate selection and move in the commodity market, conduct technical and fundamental research in advance.
Aside from these aspects, be aware of all pertinent data and requirements before beginning commodity trading. There are various additional aspects of the commodity market that you should know before starting your commodity trading journey.
Here are five easy-to-follow steps that can help you understand how to start commodity trading:
1. Become acquainted with commodity trading exchanges:
To begin commodity trading, first identify the exchanges that allow commodity trading.
In India, commodities are traded on three major exchanges:
- National Multi Commodity Exchange of India (NMCE)
- National Commodity and Derivative Exchange (NCDEX)
- Multi Commodity Exchange of India (MCX)
2. Choosing an effective stockbroker: The next crucial step in beginning commodity trading is to find a trustworthy and efficient stockbroker. When choosing a broker to trade commodities online, check the brokerage fee and other charges, such as clearing fees, platform fees, commissions, etc.
3. Create a commodity trading account: After you select a broking firm for commodity trading, the next step is to open a Demat account. First, the broker will verify your credentials and financial stability. Once the broker assesses your application, your Demat account becomes operational, and you can begin trading.
4. Make your first deposit: To initiate trading, you have to deposit the first margin, which is usually between 5 and 10% of the contract value, in your commodity trading account.
5. Make a trading strategy: After all of the requirements for commodity trading are done, it is best to create a trading plan to start trading commodities. To create the right trading plan, consider your financial competence, risk appetite and personal style.
The broker also assists you in acquiring the necessary expertise, experience and information about the commodity market. In some cases, the broker can also give you the required fundamental and technical analysis tools and platforms, enabling you to develop a successful trading strategy.
Why Trade Commodities?
Commodity trading is a smart choice for investors looking for options beyond traditional stocks and bonds. In addition, by including commodities in their portfolio, investors can diversify their portfolios.
If you are new to commodity trading, here are a few benefits to know:
- Wide trading possibilities: The commodity market is wide, and the prices of commodities are uncertain. This benefits traders by giving them plenty of trading opportunities. Traders can make money in all kinds of price fluctuations.
- Leverage: When you trade commodities online, brokerage platforms allow you to make large investments even with small deposits in your trading account. This is also known as leverage.
- Diversification:Since commodities have almost no or low correlation with traditional asset classes, commodity prices generally hike during periods when equities and bonds are experiencing a downfall. This allows traders to reduce their portfolio risk.
- Hedge against market volatility due to macro-economic factors:Natural calamities and unpredictable events such as economic crises, natural catastrophes and wars can hurt the economy and currencies can lose their value, causing the stock values to fall. Alternatively, commodities prices tend to surge during such events. This can help traders create a natural hedge for their portfolio against such catastrophes.
Commodity prices often fluctuate due to alterations in supply and demand. However, seeking help from a broker might help you get the right start with commodity trading. Understand all relevant facts before beginning commodity trading.
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- Intraday trading
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Frequently Asked Questions
It costs nothing to practise trading using a demo account, and it teaches you vital trading skills. If you want to invest limited money, commodity ETFs may be the way to go, as ETF trading often has lower costs than options and futures trading. Fractional trading may be possible with ETFs.
It is critical to understand the difference between insider trading and trade fraud. People working in an industry can trade securities relevant to that business in commodities, just as they are in stocks. Most industry insiders utilise futures to protect themselves from the dangers of doing business and keep the cost of raw materials more stable. Insiders who trade commodities with non-public information, arrange non-competitive trades or participate in other forms of fraud may suffer substantial legal consequences.