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Commodity markets are platforms that enable trading, buying and selling of commodities such as raw materials or primary products.
Commodity Trading Market
Commodity trading dates back thousands of years. Today, there are approximately 50 major global commodity markets. They facilitate the trading of approximately 100 commodities in both physical and virtual forms. The Chicago Mercantile Exchange in the US is the largest commodity market in the world with contracts numbering close to 3 billion being executed every year.
Types of Commodities
Commodities are products such as metals, agricultural produce, crude oil, etc. that are consumed by both individuals and industries alike. Like stocks, commodities too are traded in the markets to enable fair price discovery and to hedge against risk. The various commodities traded in the global markets are classified into 4 major categories.
- Metals - Gold, Platinum, Silver etc.
- Energy - Natural Gas, Crude Oil, Thermal Coal, Gasoline etc.
- Agriculture - Spices, Pulses, Oils, Grains, Wheat, Rice etc.
- Meat and Livestock- Eggs, Feeder Cattle, Meat etc.
Commodity Trading in India
Commodity trading in India dates back many centuries. Indian merchants were known throughout history to be major participants in the global commodities trade. The growth of the modern commodity trade in India however, can be traced back to the early 2000s. The introduction of dematerialized trading and online trading platforms proved to be a gamechanger for commodities markets in India, allowing even small investors to participate in commodities trading.
Commodity trading in India was regulated by the Forward Markets Commission (FMC) until 2015. In September 2015, a merger was signed between the Forward Markets Commission (FMC) and the Securities and Exchange Board of India (SEBI). Since the merger, commodity trading in India has been regulated by the SEBI.
Commodity Trading Exchanges in India
A commodity trading exchange, much like a stock exchange, is a platform that brings buyers and sellers of commodities together to trade in commodities. There are multiple commodity trading exchanges in India. The major commodity trading exchanges include:
- Multi Commodity Exchange (MCX) - It was established in November 2003 and is headquartered in Mumbai.
- Indian Commodity Exchange (ICEX) - It was established in November 2009 and is based in Gurgaon.
- National Commodity and Derivatives Exchange (NCDEX) - It is a privately owned exchange established in December 2003 and is based in Mumbai.
- National Multi Commodity Exchange (NMCE) - It was established in 2002 and is headquartered in Ahmedabad.
Out of these. MCX and NCDEX are the most prominent exchanges. These two are discussed in further detail below.
Commodities Traded in MCX
Established in 2003, MCX is the largest commodity market in India with an average daily turnover of Rs. 32,000 crores in 2019-20. The major traded commodities on MCX include:
- Bullion including gold, silver and platinum;
- Energy products such as gasoline, crude oil, natural gas, petrochemicals etc;
- Agricultural produce including pulse, castor seeds, black pepper, cotton, cardamom etc;
- Metals such as copper, nickel, zinc etc.
Commodities Traded in NCDEX
NCDEX is a leading commodity exchange specialised in agricultural products in India. Its average daily turnover in 2021 stands at Rs. 2139 crores, showing a remarkable growth over the years. NCDEX allows trading in 23 commodities, the highest number of commodities allowed across the commodities trading market worldwide. The main traded commodities on the NCDEX are:
- Fibres - Kapas, 29mm Cotton.
- Spices - Coriander, Jeera, Turmeric.
- Cereals and Pulses - Bajra, Barley, Chana, Maize, Moong, Paddy (Basmati), Wheat.
- Soft - Gur
- Guar Complex - Guar gum refined splits, Guar seed (10 MT)
- Oil and Oil Seeds - Castor oil, Cottonseed oil cake, Crude palm oil, mustard seed, refined soy oil, sesame seeds, soybean.
- Index products - AGRIDEX
NCDEX has an index known as NCDEX AGRIDEX, similar to SENSEX. Just as the sensex is a benchmark index linked to 30 handpicked stocks, NCDEX AGRIDEX is an index linked to the top 10 liquid commodities like Chana, Soybean, etc on its platform. It also has the NCDEX monsoon index and the NCDEX rain index which annually tracks monsoon in India between 1st June and 30th September as the monsoon is critical to agricultural productivity and the overall health of the Indian economy.
Participants in the Commodities Markets
Generally there are three types of participants in most commodity markets:
- Hedgers - These are usually industries or manufacturers dependent on commodities as raw materials who enter the market to mitigate risk. For instance a large copper wiring maker might want to buy up stock of copper at a fixed price to avoid the risk that the price of copper might go up in the near future.
- Speculators - Like in the stock markets, speculators have no real need for the underlying commodity. They enter the markets solely to profit from price fluctuations.
- Arbitrageurs - Arbitrageurs are sophisticated traders who seek to profit from the difference in price of the same commodity being traded across different exchanges. Since most exchanges are now online and are updated in real time, such price differences across exchanges tend to be very slight. Arbitrageurs therefore leverage the power of sophisticated technology and algorithms to spot these fractional differences and exploit them by taking large positions.
5 Ways to Invest in Commodity Market in India
Investors seeking to participate in the fast-growing Indian commodities markets can do so through any of the following routes: .
1. Commodity Exchange Traded Funds (ETFs)
Commodity Exchange Traded Funds are similar to mutual funds with the exception that they invest in commodities and can be traded on the exchange throughout the day. Investing in commodity ETFs offers you the flexibility to invest either in a single commodity or in a basket of commodities.
2. Commodity Mutual Funds
Commodity mutual funds are funds that invest in commodities and are bought and sold at the end of a trading day. They are managed by professional fund managers and are a great option for investors new to commodity trading who do not wish to invest directly into commodities.
3. Commodity Options
Investing in commodity options gives you the right to buy or sell commodities at a predetermined specific date and specific price. This is just a right and not an obligation. This way, while you trade in commodity options, you can choose not to exercise this right.
4. Commodity Futures
Investing in a commodity futures contract means you are entering an agreement to buy or sell the commodities at a predetermined date and rate in the future. Unlike an options contract, here you have an obligation to buy or sell the commodity at a specific date and price.
5. Physical Commodities
This is usually done by industries and manufacturers as they may need the commodity as a raw material for production. Speculators generally stay away from buying or selling of physical commodities as delivery of the commodity requires storage space and taking care of insurance costs that speculators do not have the capacity for.
Why Should You Trade in Commodity Markets in India?
The Indian commodities market has come a long way from its humble beginnings. Today Indian commodity exchanges are highly sophisticated and regarded as among the best in the world. They offer nearly all kinds of investment options and contracts used in commodity trading.
Commodities are a good way to diversify your portfolio and spread risk across different asset classes. However investing in commodities also comes with an element of risk as commodity prices can be very sensitive to global macroeconomic and geopolitical cues. If you are new to commodity trading, it is best that you do your own due diligence before investing in commodities.
Wrapping up
Commodity trading in India is growing fast as manufacturers discover the benefits of hedging risk through commodity futures and investors seek to diversify their portfolios. Indian exchanges are well regulated and are at a par with the best in the world. If you want to start trading commodities in India, it is advisable that you start by investing through commodity mutual funds or ETFs rather than investing directly. It is also important that you educate yourself thoroughly about all aspects of commodity trading before risking your capital in the markets. There are several free and comprehensive learning resources such as smartmoney by Angel Broking available online that you can use to learn about commodity trading in India.
FAQs
Do I need to open separate demat accounts for investing in stocks and commodities?
No, you can trade in both equities and commodities using only one demat account. Make sure you open a demat account with a good broking firm that allows access to both equities and commodities trading from their trading platform.
Is trading in commodities risky?
Equities and commodities, like all market related instruments come with risks attached and investors must understand these completely before investing in them.
I’ve invested in equities before but I know nothing about commodities. Should I be investing in commodities?
Investing in commodities is a good way of diversifying your portfolio and spreading risk around. It is advisable that you use a good online learning resource to learn about commodities before investing.
If I place an order for buying gold on MCX, will it be delivered to my home?
No. Contracts are automatically squared off on expiry unless you exit them before the expiry date.
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