Commodity markets are global platforms where traders buy and sell primary products rather than manufactured goods or services. These markets primarily deal with derivative instruments like futures and options, which are contracts set to be executed at a future date at predetermined prices.
Similar to stock markets, commodity prices fluctuate based on global demand and supply dynamics, and their current rates are readily available on commodity exchanges. Commodities traded on these exchanges fall into four main categories: agricultural products, metals, precious metals and energy resources.
As the name suggests, commodity trading accounts enable traders to directly exchange these commodities with ease. Continue reading this blog to have a deeper understanding of commodity trading and how to open a commodity trading account.
What is Commodity Market Trading?
Commodity trading involves buying and selling naturally occurring raw materials or resources that are standardised, have intrinsic value and are used to produce refined goods or services. Commodities are typically categorised into two types:
- Soft Commodities: These include agricultural products like rice, wheat and other crops, primarily used for direct consumption.
- Hard Commodities: These include resources such as crude oil, natural gas, gold, silver, copper and other metals, often used as inputs for manufacturing and delivering services.
Commodities are traded in large quantities daily, with their prices constantly influenced by the forces of supply and demand. Price fluctuations in these goods create opportunities for traders to profit from market movements. Commodity trading magnifies these price swings, enabling traders to capitalise on them.
In India, you can trade commodities directly or through derivative instruments such as commodity futures and options (F&O), which are particularly popular among market participants in the commodity market looking to hedge risks or speculate on price changes.
Process to Open a Commodity Trading Account
Opening a commodity trading account with a reputable broker is the first step to becoming a commodity trader. Here’s how to open a commodity trading account:
- Fill Out the Application Form: Begin by completing the MCX account opening form provided by the broker.
- Submit KYC Documents: Provide the following for verification such as a proof of identity and proof of address.
- Execute Member-Client Agreement: Prepared on non-judicial paper, this agreement outlines the broker's services, fees, and responsibilities. Ensure the broker legally stamps this and that you pay the applicable stamp duty and registration fees.
- Submit Income Proof: This may include business account statements, ITR V, Form 16, bank statements (last six months) or net worth or demat holding certificates.
- Provide Demat Account Details: Link your Demat account to enable the seamless credit or debit of derivative instruments.
- Deposit Initial Margin: Submit a cheque for the margin deposit, which varies by broker. Confirm the required amount beforehand.
Benefits of Opening a Commodity Trading Account
Online trading in commodities offers several advantages. By leveraging these benefits, traders and investors can enhance their strategies and maximise their financial potential in the commodity market:
- Fully Digital Access: Commodity trading is easy and entirely online. You can trade from any internet-enabled device, such as a smartphone or laptop.
- High Liquidity: The commodity market’s high liquidity ensures that assets can be easily bought or sold as needed.
- Leverage for Higher Returns: Commodities are highly leveraged, allowing you to trade with minimal capital and amplify potential profits from even small price movements.
- Portfolio Diversification: Commodities have a low correlation with equity stocks, making them an effective way to diversify your investment portfolio.
- Inflation Hedge: Commodities often perform well during high inflation, as their prices typically rise alongside inflationary pressures. However, it's essential to understand that commodities are more volatile than other investments.
- Transparency and Regulation: In India, the commodity market is regulated and transparent, ensuring a secure trading environment.
- Potential for High Returns: Commodity prices fluctuate due to factors like supply and demand, inflation and economic health. Global infrastructure projects have recently driven up demand, positively impacting commodity prices and related industries.
- Low Margin Requirement: Traders only need to deposit 5-10% of the contract value as a margin, enabling larger positions with relatively small capital compared to other asset classes.
How to Trade in the Commodity Market?
Once you have opened a commodity trading account, here is a step-by-step guide to get started:
- Fund Your Account: Deposit the required margin amount into your trading account to begin trading. Ensure the deposit aligns with your risk tolerance and chosen trading strategy.
- Research and Analyse the Market: Study different commodities and understand the factors influencing their prices, such as supply and demand, economic trends and global events. Stay informed with expert insights to make well-informed trading decisions.
- Select a Trading Strategy: Select a strategy that aligns with your goals and risk appetite. Popular strategies include mean reversion, trend following and scalping.
- Place Your Trades: Trade through the best commodity trading platform during commodity market hours (until 9 PM). Use order types such as market order or limit order.
- Monitor the Market: Track your chosen commodities, global news and economic conditions. Adjust your strategy as needed to respond to market changes.
The Bottom Line
Commodities offer portfolio diversification and protection against inflation but come with high risk. A solid understanding of market dynamics, supply and demand and inflation is essential. Once you have done your due diligence, you can find out how to open a commodity trading account. With time and experience, you can build a well-balanced portfolio to achieve your desired returns.