Commodity Trading :
Commodity trading is a group of assets goods that are important in everyday life in trading. This commodity trading is the buying and selling of physical goods in the commodity market, Such as food energy, or metals. A commodity is alternate and exchangeable by nature. The Commodity trading essence commodity moves the raw materials necessary for daily life from their place of production or extraction to their place of consumption. A commodity can be categorized as every kind of movable good that can be bought and sold except for actionable claims and money. This commodity value chain is long and complex, involving many different actors throughout the world.
The Commodity in India started way back in time. Even before it did in many other countries. The foreign invasions and ruling natural calamities and countless government policies and their amendments were major reasons for the diminishing of the commodity. A commodity has the commercial value that can be produced. The commodity is a diverse industry. The Commodity houses can be small local operations of just a few people or huge multinational companies with tens of thousands of employees across the world.
Commodity in India brings a basket full of diverse avenues for investment, away from the traditional avenues of equity bonds and real estate. Based on the historical data adding commodity trading exposure to your existing portfolio helps you increase the returns. While lowering the Risk. The Commodity has very little or negative correlation with other asset classes.
Where to invest in Commodity Trading online in India?
There are six major Commodity trading exchanges in India, as listed below:
- Multi Commodity Exchange – ( MCE )
- National Commodity and Derivatives Exchange – ( NCDEX )
- National Multi Commodity Exchange – ( NMCE )
- Indian Commodity Exchange – ( ICEX )
- Ace Derivatives Exchange – ( ACE )
- The Universal Commodity Exchange – ( UCX )
The regulatory body of the commodities trading in 2015. These are the Forward Market Commission (FMC), Securities and Exchange Board of India ( SEBI ). These trading in these exchanges requires standard agreements as per the instructions so that trades can be executed without visual inspection of commodity trading.
General Commodities :
Advantages of Commodity Trading:
Commodity trading in India offers many advantages compared to other methods of trading. These are mostly investing in commodities that provide benefits to investors at times of economic uncertainties.
The portfolio of Diversification:-
Diversification is when you invest in a variety of industries that give results differently to changes in the market. It will keep your annual profit stable and also avoid big losses. By investing in commodities along with stocks, bonds, and other methods. The trader can protect himself from a sudden fall in one of the asset classes. Investing in commodities helps to improve returns and reduce volatility.
Higher opportunities of growth and return:-
This commodity trading in India is quite risky, but if the risks are managed well and the investments are made right after proper research and analysis. It can turn out to be very rewarding and profitable. The commodity provides a lot of opportunities to make quick income through commodity investment.
Provide security against inflation:-
Inflation is bad for regular trading at the time of inflation. When the economy starts to go down and bond investment profit while commodities usually positive in the time of inflation. The value of commodities needed to produce these goods and services will aromatically rise. It can help the investors to benefit from the upswing and protect themselves from high commodity prices.
The commodity futures operate on margin, meaning that to take a position. The margin amount required for commodity trading is about 5 – 10% of the contract value. Which is quite less as compared to other asset classes. Only a fraction of the total value needs to be available in cash in the trading account.
The commission cost is cheaper to buying and selling one futures contract than to buy and sell the underlying instrument. The One full-size MCX GOLD contract is currently worth more than 35,00,000 INR and could be bought/sold for as little as 100,000 INR. These are the expense of buying selling 35,00,000 INR could be 100,000 INR + or -.
These are the involvement of speculators means that futures contracts are reasonably liquid in the commodity. Investments in commodities are highly liquid as compared to investments in other asset classes like Real estate. Buying and selling are very easy and quick. So the positions can be squared off and cashed as and when required.
Ability to go short:-
Futures contracts can be sold as easily as they are bought, enabling a speculator. To the profit from falling markets as well as rising ones in the Commodity. There is no uptick rule, for example, like there is with stocks in the commodity trading.
How do you Invest in Commodities:
These Commodity investing is a lot different from trading other types of investments in the commodity. The commodity is the best way to invest in commodities through a futures contract, which is an agreement to buy or sell a specific quantity of a commodity at a set price at a future time. The biggest challenge with commodities is that there are physical goods. The commodity trader uses these contracts as prevention towards the risks associated with the price swing of a futures implicit trade good or raw materials.
There are 4 ways to invest in commodities:
- Investing directly in the commodity
- Using commodity futures contracts to invest
- Buying shares of exchange-traded funds that specialize in commodities.
- Buying shares of stocks in companies that produce commodities.
If you want to invest directly in the actual commodity, you have to figure it out. Where to get it and how to store it. Another way to gain exposure to commodities is through mutual funds that invest in commodity-related businesses. When you want to sell the commodity you have to find a buyer and handle it. The logistics of delivery in commodity trading. This trading in commodities involves high risk for amateur investors.
What are Mutual funds and Index Funds in commodity Trading?
Mutual Funds: A Mutual fund is an investment scheme that collects money from people and invests those funds in various assets. These investors can choose a mutual fund scheme based on their financial goals and start investing to achieve the goal. The money collected from various investors is usually invested in financial securities on investing mutual funds — these like shares and money market instruments like certificate of deposit and bonds.
Index Funds: These Index funds as the name suggests invest in an index. The index fund is a type of mutual fund with a portfolio constructed to match or track. The components of a financial index. These are funds that purchase all the stocks in the same proportion as in a particular index. This is means the scheme will perform in tandem with the index it is tracking save for a small difference known as tracking error.
This is quite impossible for the direct investment of mutual funds in commodity trading. Another indicator way of commodity trading in India is to invest in mutual funds and index funds. There is an investment in stocks of the companies involved in commodity trading related industries. Some commodities index mutual funds also invest directly in futures contracts and commodity-linked derivatives and give direct exposure.
What are ETF and ETN?
This Investor can participate in commodity trading price fluctuations. The trading in commodities without directly investing in futures is possible with Exchange Traded Funds ( ETF ), and Exchange Traded Notes (ETN).
ETF : (Exchange Traded Funds) The learn about ETFs that invest in commodities such as precious metals, agricultural products, or hydrocarbons. The interest in commodity-based ETFs has exploded and shows little sign of abating. In the commodity space.
- Physically backed funds
- Equity funds
- Futures-based funds
- Exchange-Traded Notes
These futures provide leverage (more exposure than actual cash invested). ETFs that use futures contracts have uninvested cash, which they usually park in interest-bearing government bonds. ETFs provide investments into a fund that holds the assets it tracks like stocks bonds or metals. This equity-based commodity ETF can give investors exposure to multiple companies or specific sectors. In a simpler, more inexpensive manner than buying the underlying companies themselves.
ETN : (Exchange Traded Notes) ETNs were developed to make investing in hard to access instruments. These like commodity and currency areas more accessible to retail investors. The ETNs are similar to exchange-traded funds in the trade on the stock exchange and track benchmark index commodities. The ETN is a senior unsecured debt security issued by a bank. Unlike an ETF that holds assets such as stocks, commodities, or currencies. Which is the basis of the price of the ETF? These are the return of an ETN that is liked to a stock market index or other benchmarks. The ETN promises to pay at maturity the full value of the index minus the management fee. These like any other debt security, the investor is subject to the credit risk of the bank issuer. These are the main risk involved with ETNs is the credit quality of the issuing institution.
Pros and Cons Investment in Commodities:
These are all investments has its benefits as well as its risk. The commodity is a basic good that can be bought and sold the purchase and sale of commodities is usually carried out through futures contracts on a commodities trading. Many of us invest in commodities or raw materials because they are essential to our everyday lives.
Investment in Commodities
|Stocks||– Extremely liquid investments
– Investment research is easily accessible
– Tradable through personal brokerage accounts
|– Investments are in commodity-related companies, not in actual commodities
– Even if the commodity is performing well, a particular company may not be
|ETFs||– Low-fee investment option
– ETF indexes offer ample protection
– Not difficult to invest in
|– If only a select few stocks are doing well, an ETF may not be significantly altered
– Not available for all commodities
|Futures contracts||– The most direct way to invest in commodities
– Possibility for strong returns
– Perform well on a large scale
|– Possibility for heavy losses
– Minimum deposits necessary
|Mutual funds||– Inherent diversification
– Managed by investment advisors
– Similar liquidity to stocks
|– Professional management comes with proprietary fees
– Indirectly invested in commodities
Commodity As Stocks :
In India, Commodity trading also is done in the form of buying and selling stocks of companies related to commodities. The commodity trading first is the retail investors understand stock markets better than they can make sense of commodities stocks market. In the stock markets, they can buy and sell stocks at current market prices, without the trouble of taking the route of the future, which is the entails predicting future prices.
Instead of buying actual oil contracts, the trader can buy stocks of the refineries or oil companies. Such as the move in the same direction as the futures would. But they are easy to buy and hold and are less volatile comparatively. These are stocks that require more research and know-how. Instead of direct stocks, stock options can also be traded, which require less investment and the risk is also limited to only the cost of the option.
What is MCX?
The trade of commodities is the commodity market facilitated by the MCX ( Multi Commodity Exchange ) and is often referred to as MCX Trading. The MCX of India is a commodity exchange which is based in Mumbai and operates out of India. MCX provides a platform for Trading in commodities, just like BSE and NSE provide platforms for trading in the stock. It was offers trading options in several commodities, including gold, silver, cotton, palm oil, etc. These are regarded as one of the largest exchanges In the world. It has an 84% share if the market in India and is ranked the best commodity exchange in the country. Gold is the highest traded item in MCX with it opening the doors to fortune for thousands in the nation.
MCX Trading tips for beginners:
The world of commodity trading can be daunting, especially to the uninitialized, making them prone to errors. Here are a few gold commodity trading tips which could help you survive in this competitive world.
Stay patient: –
This is possible for us to be jumpy or overconfident while investing but acting hastily could lead to your downfall. One must exhibit patience while participating in the MCX.
Invest in multiple commodities: –
These are Keeping all your eggs in one basket will do you more harm than good and diversification is crucial.
Don’t believe what you hear: –
Then it is easy to get carried away by things you hear. Experiencing it first hand is important, and blindly following the crowd could lead to your downfall.
Don’t hesitate to ask for help:-
There are several analysts and advisors. Whose main job is to help people who are lost in a trade. Approaching a good analyst for help is the right way to go in certain situations.
The stock market is not the same as the commodity market: –
The commodity market is easy for us to confuse ourselves between the stock and commodity markets, but one should know that both of these are separate entities, and different strategies should be used.
It is imperative that an investor continuously stays abreast of current happenings and evolves when it comes to investment ideas and strategies.
Invest slowly: –
These are one can get carry away by the prospect of fast money. But it is ideal to be slow and invest progressively as the understanding of how the market functions increases.
Understand the risk involved:-
There is considerable risk involved while investing, and one should always remember theses are risks.
Commodity Future Trading :
The most popular way of commodity trading is through trading a commodity futures contract. The buyer and seller agree to buy and sell a specific quantity of a specific commodity at a predetermined price at a later time. Commodity futures can use to hedge or protect an investment position or to bet on the directional move of the underlying asset. The entities in the commodity futures contract are mainly hedgers or speculators.
Many investors confuse futures contracts with options contracts. With the futures contracts, the holder must act. Unless the holder unwinds the futures contracts, the holder must act. Hedgers are mainly importers of exports or manufacture who enter into the futures contract to reduce their risks of financial loss due to a change in the price of commodities at a later date. Most commodity trading futures contracts are closed out or netted at their expiration date the price difference between the original trade and the closing trade is cash-settled. These are the commodity future trading. That is typically used to take a position in an underlying asset in the commodity.
What are the Advantages and Disadvantages Future?
Advantages of the Future:
- The future is a high leverage investment in commodity future trading.
- Future markets are very liquid in the commodity future.
- This is the future that gives huge profits if traded carefully.
- The commodity trading future affordable minimum deposit accounts and full-size controlled contracts.
- The long or short futures can set as targets easily.
Disadvantages of the Future:
- This is the future markets ate volatile.
- The direct investment in the markets is of high risk, especially for novice investors.
- The gains and losses are magnified by leverage/
- Then the unpredictable movement of trade even before you close your position.
The Factors to keep in mind before you start commodity trading online :
- These are certain factors that you should keep in mind before you start commodity trading. There are
- Choosing a trustworthy commodity broker, many commodity traders offer online trading services in India. You need to choose a trader who can help you with online trading from start to end.
- You need to choose whether you want to spot trading or trade through future contracts.
- This need to keep in mind the delivery factor here.
How to Start Commodity Trading Online?
Open an online trading account and Demat account:
Once you have chosen a trustworthy broker, you need to open a Demat and trading account. You can open the account with the broker itself.
Select an Initial Investment amount
Once you have opened the online commodity trading account, you have to make an initial investment to start trading. The initial margin is generally equal to the 5 – 10% of the contract value. As a trader, you also supposed to have a maintenance margin that will help you cover the losses if any.
Build on a trading strategy:
You need to have a plan to start commodity trading. That can make a plan based on the understanding of the market your trading style risk appetite capital availability etc. You can practice trading on simulations. You can build a strategy that fulfils your objective of Commodity trading in the first place.
Commodity Trading Risks :
Like all other forms of investment and trading commodity trading is also subject to many risks. The risks get multiple when the investor enters the market unprepared or with very high expectations. The caution has to exercise, and trading is done according to one’s risk appetite.
High leverage :
The margin amount required for commodity trading in India in 2019 is quite less, thereby providing an advantage. However, high force may also act as a trip if not handled well.
High volatility :
Commodity trading, on the whole, is quite risky in terms of volatility. The volatility of commodities is almost twice that of stocks and four times that of bonds.
Lack of Knowledge and understanding :
The basis of any form is trading is knowledge and experience. Many new traders do not educate themselves and simply throw themselves into the sea of trading unprepared. The traders must read good commodity trading books talk and share experiences with other seasoned traders.
At the same time, the market is quite volatile and risky, so the traders need to exercise caution before entering the market and must remain focused dedicated, and diligent in making good profits and reducing losses.