How to Start Commodity Trading?

The evolution and growth of the commodities market in India has shown an impressive record of performance. Commodity Trading is one of the upcoming forms of trading in India. After equity, real estate and precious metals like gold and silver, people have started investing in commodities too. It is the new avenue for the retail investors and traders to participate in.

Although commodity trading has its own risks and challenges, it is also a rewarding platform. It has proved helpful for the traders in making huge profits in the past.

But just like other forms of trading, commodity trading also requires a lot of hard work, knowledge, experience and perseverance.

The traders must be well versed of the commodities, the markets and the world economy that causes the price fluctuations in the commodities. The traders must also understand and practice the fundamental analysis as well as the technical analysis. This enables them to make the right moves in the commodity trading market.

Owing to all the above factors, it is always advisable to be well prepared before the traders get to start commodity trading.

In general, commodities are classified into 4 types:

  1. Metals – Silver, Gold, Platinum, and Copper
  2. Energy – Crude oil, Natural gas, Gasoline, and Heating oil
  3. Agriculture – Corn, Beans, Rice, Wheat, etc.,
  4. Livestock and Meat – Eggs, Pork, Cattle, etc.,


The following steps are necessary to start commodity trading :

There are multiple other aspects one needs to take care of before you start commodity trading. Here in this analysis, we have tried to cover as much information possible that can assist you in understanding where you should be placing your feet first.

Let’s review each of these aspects one by one:


1. Knowing about the Commodity Trading Exchanges

The initial step for a trader to start commodity trading is to know what exchanges are commodities traded on.

In India, there are primarily 5 exchanges authorized for trading commodity derivatives, these include; the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), the National Commodity and Derivative Exchange (NCDEX), the National Multi Commodity Exchange of India Ltd. (NMCE), the Indian Commodity Exchange Limited (ICX) and the Multi Commodity Exchange of India Ltd. (MCX). Out of the 5 mentioned above only NSE and BSE are allowed to offer derivative contracts in both equity and commodity segments.

Commodities are traded online on these exchanges in India.

Year 2002-03 witnessed a surge in volumes in the commodity futures markets in India. The 20 plus then commodity exchanges clocked a volume of about 14,025.74 lakh tonnes in 2011-12 against the volume of 314.46 lakh tonnes  in 2002-03, a  remarkable performance for an industry that is being revived.


2. Choosing the Right Stockbroker

A very important step to start commodity trading is to choose a suitable and efficient broking company. The broker has to be mandatorily registered and regulated by the regulators. The choice of the broking company is critical because it is the stockbrokers that hold your account and execute your trades.

The brokers also help in keeping the traders well-informed on commodity trading and in making sound financial decisions through their recommendations. So, if the broker himself is not a successful and well-versed person, the trader may end up losing a lot of money in no time.

Also, while choosing a broker, the trader must see the kind of fee (or brokerage) they charge as the fee varies from company to company and there may be various types of fees like the commission, platform fee, clearing fee etc. Another factor to consider while choosing a broker is the kind of services they provide on their platform.

The platform can be checked using their free trial to see if it has all the requisites like charts, market data, research and analysis available on their online trading platform.

Some of the most sought after brokers in India as of know are:

  1. Zerodha
  2. Sharekhan
  3. Angel Broking
  4. Trade Smart Online

It is a competitive market that is witnessing rapid changes and will evolve itself in the coming time.


3. Opening the Commodity Trading Account

After selecting the broking company , the next step to start commodity trading is to open the demat account. It is done by filling up an application form with the broker and providing information related to age, financial status, income etc.

The broker then analyses the information and depending on the risk-taking capabilities, credit rating and trading experience of the investor the company approves or rejects the opening of the account. The analysis is important for the broker as he needs to ensure that the trader has the financial ability to pay off his debts. This is in case the market goes against his expectations and he suffers a loss.

Once the application is approved, the account gets opened and is good to use.


4. Committing the Minimum Investment

Once the commodity trading account has been opened, the trader has to make an initial deposit to start commodity trading. The initial margin is deposited which is generally equal to 5 – 10% of the contract value. For instance, for trading gold, the initial margin money is ₹3200 which is equal to 10% of one trading unit (10 gm) of gold.

Along with the initial margin, a maintenance margin has to be maintained by the trader so that he is in a position to cover up the losses in case of adverse market scenarios.


5. Making a Trading plan

After the formalities have been completed , the trader must develop a trading plan to start commodity trading. The trading plan is developed by knowing and understanding the market, practicing on simulations. Also each trader understands his own personal style, risk appetite and capital availability.

The trading plan that works for one commodity trader may not be the ideal one for another trader. The broking company helps the trader in gaining the required information, knowledge and practice. Also, they provide them with the necessary fundamental and technical analysis tools and platforms as well.

The trader must also develop trading strategies that are suitable for his objectives and trading style.

Thus, in order to start commodity trading, an investor must be well-prepared and well-aware. The basic paperwork and formalities are to be completed and then the trader needs to put himself in the right mode and state of mind to enter this challenging domain so that he does the trading securely and profitably.

The trader must also practice risk management techniques and not overtrade in order to make sure that he does not end up losing more than he can afford to. Most importantly, being successful at commodities trading requires a lot of hard work and dedication that the trader must make himself prepared for.


Growth in Indian Commodities Market

 India’s commodity derivatives market was one of the fastest growing commodity derivative markets in 2018, with India’s largest exchange – Multi Commodity Exchange of India (MCX) – displaying an annual growth of 16% over the levels of 2017.

India’s commodity derivatives market was brought into the regulatory ambit of the Securities and Exchanges Board of India (SEBI) in September 2015, following the merger of the Forward Markets Commission with SEBI. SEBI is an autonomous regulator and has developed the Indian securities markets for the past two decades. With a market capitalization USD 2.1 Tn (as on 31 December 2018), India’s securities market was the world’s 7th largest. SEBI’s experience has thus augured well for the commodity derivatives market.

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