Many of us are aware of trading in the secondary market that involves buying and selling stocks, bonds and other financial securities. However, there is another way to trade in the financial market based on commodities.
Published on 17 March 2023
It is a way of diversifying your portfolio to balance profit and loss. MCX is central to such commodity trading. With good research and the essential knowledge, you can master commodity trading to earn a good profit. So, let us get started and understand what is MCX in Trading.
Multi Commodity Exchange of India Ltd is an exchange owned by the Government of India to manage commodity trading. It is an online platform and a regulated exchange used by traders to buy and sell commodities.
The MCX has been operational since 2003 and is the largest commodity exchange in India based in Mumbai. Types of commodities traded in the exchange include hard and soft commodities.
While you look into the platform for engaging in commodity trading, you should be aware of the different types of commodities. Here are a few main categories:
Traders may not necessarily choose to take physical delivery of the commodities. Instead, they can engage in the futures contract.
Traders utilise the futures contract to trade in commodities and make reasonable profits. A futures contract is a type of contract in the derivatives market wherein two parties mutually agree to buy and sell a commodity of a predefined quantity at a specific price on a future date.
People owning commodity businesses engage in MCX trading based on a futures contract to minimise the financial risk of decreasing prices if it is bound to occur. It is a strategy referred to as hedging.
Speculators who are experienced in MCX trading based on the volatile financial market engage in commodity trading to earn higher profits.
In India, gold and silver are the two most important commodities traded in MCX. These precious metals are available in various lot sizes.
Traders engage in commodity trading for various reasons. Here are a few important pointers to help you understand.
1. Diversification of portfolio - Trading in commodities as an individual asset class, helps you diversify your portfolio. It has a negative or low correlation based on the returns from other asset classes such as stocks.
For instance, if oil prices increase, the cost of owning a vehicle also increases. However, it will decline vehicles' sales, affecting the auto stocks dramatically. Therefore, any losses incurred in the stock market will be compensated by the profits in the commodity market.
2. Safeguarding commodity prices from inflation - Inflation can drastically affect the price of commodities in the future. Hedging in MCX trading can help reduce such losses to a great extent.
Also Read: Hedging in Stock Market
3. Hedging against political events - When the global world is affected by an event such as a war, the stock prices of various industries tend to fall. And there is also a demand and supply mismatch leading to an excessive increase in the commodities that can help you reduce your financial losses.
4. High leverage - Commodity trading based on futures and options offer a high degree of leverage. You can control your position by paying a small proportion of the contract value as the upfront margin.
5. Transparency - With technological advancement, the online platform ensures fair price determination. The price discovery happens when the buyer and seller match the quotes perfectly. And, as the buyer and seller remain anonymous, there is no manipulation.
MCX Trading can be disadvantageous based on the following reasons.
1. Volatility - The prices of commodities depend on the demand and supply and are extremely volatile. And the supply and demand of the commodities are price inelastic, which means even when there are extreme price changes, the supply remains the same.
For example, when fuel prices increase, the supply remains limited as extraction is costly and takes time. People who are habituated to travel and cannot afford the increased cost might plan to shift towards electric vehicles, resulting in a major shift in the price range.
2. Leverage - Leverage can be a disadvantage if it can take away a significant portion of the contract value in extreme cases. Evaluating the leverage and the transaction costs is essential before engaging in commodity trading.
MCX Trading refers to trading commodities in the Multi Commodity Exchange Of India Limited. It is based on trading hard and soft commodities. Businessmen engage in futures contracts based on the commodities as a hedging tool to minimise the possibility of risk and speculators to make profits.
However, it is important to evaluate the advantages and disadvantages based on your investment and risk appetite and trade on commodities. So, now that you understand what is MCX in share market, research about the different commodity price movements or take the help of professionals to profit from commodity trading.