How To Trade In Commodities?

Commodities are necessary items that are used for everyday use and can be bought and sold on commodity exchange. For example, food, oil, energy, metals, and so on. In the world of financial markets, apart from stocks, commodities are also traded in the financial market. Investors can trade commodities on commodity exchanges just like stocks that are traded on stock exchanges. Although commodity trading is considered the most challenging among investors and expert traders out there because it is quite different from trading in stocks and bonds.

One should keep in mind that trading in the commodity market is associated with a high risk-to-reward ratio and the change in the price of one commodity can have a major effect on the world. So, commodity trading can be preferable to those who have some years of experience and skill.

Types of commodities trade in India

Commodities in India that can be traded are divided into four categories:

  1. Energy (Oil and natural gas)
  2. Agriculture (Cotton, black pepper, oil, cardamom, etc)
  3. Bullion (Gold and silver)
  4. Base metals (copper, aluminum, lead, zinc)

Commodity exchanges in India

There are commodity exchanges in India that facilitate buying and selling of commodities just like stock exchanges.

Some well-known commodity exchanges in India are:

  1. National multi-commodity exchange: Trade in gold, mustard, jute, aluminum, copper, coffee, etc.
  2. National Commodity and Derivatives Exchange Ltd: Trade in Fibres, seeds, oil, crude oil, copper steel, and so on.
  3. Multi Commodity Exchange of India: Trade in bullion, energy, Metal, petrochemicals, Cereals, pulses, etc.
  4. Indian Commodity Exchange: Trade in Gold, silver, copper, lead, soybean, natural gas, and so on.
  5. Universal Commodity Exchange: Trade in Mustard, turmeric, chana, soya bean, etc.

Rates of MCX gold were trading at Rs. 50,324 Per 10 grams and as you know gold rate today varied from place to place.

Steps to start trading in commodities

  • The first step to starting commodity investment is opening a Demat account. You can open a Demat account from a brokerage house that is well reputed in the market. Also do not forget to check brokerage fees because high brokerage fees can eat most of your profits and recommendation to make informed decisions. However, recommendations and research-based information are provided by full-service brokers.
  • After the completion of the account opening process, you need to deposit an initial amount that can be 5 to 10% of your contract value, also you need to keep in mind that you need to maintain a sufficient margin to cover up losses.
  • Plan your trading to start commodity trading based on your risk tolerance, strategy, and financial ability. You should be well aware of the fundamentals and technical analysis before planning your strategy.

 Benefits of trading in commodities

  • Diversification: Commodities are alternative investments of stocks & bonds. It balances your portfolio and reduces your risk exposure.
  • Hedge against inflation: commodities price rises when inflation is high so, investing in commodities maintains the purchasing power parity. Also when there is supply chain disruption during geopolitical tensions, it acts as a good hedge against inflation. Therefore, investing in commodities hedges against inflation and geopolitical risks.

To conclude, commodity trading is an alternative asset that provides a great way to derive maximum value. However, a trader should have basic knowledge and be well versed in trading commodity markets. Traders need to keep in mind to estimate their risk appetite as several risks are associated with commodity investment.


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