Commodity Trading: An Avenue Of Big Profits
Mar 16, 2018 | 15:14 PM IST
Mar 16, 2018 | 15:14 PM IST
If you are a stock market investor, you must be familiar with the word "commodities". Many times, the brokers which provide trading and demat account for equity also provide the service for commodity trading. Commodity trading is different than equity. It's a different asset class altogether. In the commodity market, there are no shares and stocks but just commodities i.e. gold, silver, copper, etc. Like there are sectors in the equity market, the commodity market is segmented into the categories like agriculture, metals, etc. However, there are some similarities in equity and commodity. In both of these asset classes, you can trade in futures and options and you get a sizable margin from the brokerage firms.
Commodity trading is a broad concept. Investors who are into equity can't just switch gears and get in the commodity market. There are many things which entirely different. Thus being a smart investor, its incumbent upon you to study and understand all the nitty-gritty of commodity trading before taking the plunge.
Let's explore the potential of the commodity market. In our journey, we will try to understand what this medium has to offer, who should try their hand at it and the most important question - is commodity better than equity.
Contents
What Is Commodity Market?
Long before the future trading started there was a practice of futures trading in commodities. Of course, these trading were done in an unorganised manner. In the older times, businessmen and traders would use futures trading to hedge the risk of rate volatility. There are various references to futures trading in the Indian and Chinese markets. The first milestone came in 1848 when the first organized trading exchange was established in Chicago by Chicago Board of Trade (CBOT).
In India, the unorganised future trading is quite old but it took the organised form only in the year 2002. In India, there are two commodity exchanges Multi Commodity Exchange (MCX) and National Commodity and Derivative Exchange (NCDEX). MCX is popular for the Metals and Energy commodities while NCDEX is focused on agri commodities.
How To Open A Commodity Trading Account?
You need a demat account to start trading in commodities. If you are already an equity investor/trader then you can just contact your brokerage firm get the commodity service activated on your account. Brokerage firms like ShareKhan, Angel Broking, SMC Global are some of the leading full-service brokerage firms which offer Commodity trading services. As all the investment and trading forums in India are regulated and monitored by SEBI, all the customer needs to be KYC compliant in order to start trading commodities.
How To Trade Commodities?
Once you have opened an account, naturally, you would like to start trading. Now a different question will stare at you - how much money do I need to start trading?
Commodities trading is mostly done on the goods that are the same irrespective of where you buy them. For example, the rate of gold is more or less the same and does not differ considerably from gold sold elsewhere. In the same line, cotton is a traded commodity because its rate is the same whether you are buying it in Gujarat or Maharashtra.
The commodity trading is different from equity trading. Unlike equity, where there are stocks of the company, in commodities, there are just products i.e. Agriculture products, Metal products, etc.
You can begin your commodity trading with as low as Rs.5,000. The commodity trading is done on margin thus you have to pay margin money, that differs from product to product. The margin is usually 5-10% of the commodity price. For example, for one lot of gold mini (100 grams), the margin would be somewhere around Rs.7,500 (depending on the current rate of the commodity). If the current price of the gold mini is Rs.30,000, then you only have to pay Rs.7,500 per lot of gold mini for a future contract. If the price of gold rises after you buy the contract by Rs.500, then Rs.500 will be credited to your demat account. In the same line, if the price decreases by Rs.300, then Rs.300 will be debited from your account. The point is, while trading you dont have to pay the entire amount of the lot but just have to deposit the margin that is Rs.7,500 in the case of above example.
The most important point is, commodities are bought and sold for speculative purposes, where investors placing bids with the intention of earning profits on the rise and fall of the price of a particular good in a certain period of time. Furthermore, as commodities are not associated with any company, they do not pay dividends, nor do they produce earnings statements or cash flow statements to investors, as they do in equity. Nonetheless, commodity trading can be extremely profitable if it is done with the right approach. However, unlike equities, for commodities, you need a solid understanding of how the commodity is used, and most importantly how the future may influence the demand and supply of a particular good.
Commodities That Are Actively Traded On MCX & NCDEX
There are various commodities which are traded every day on both the exchanges. There is a clear segmentation of the commodities. Let's take a look the segments and the commodities that fall under them.
| Sectors | Commodities |
|---|---|
| Agriculture | Rice, Basmati rice, wheat, maize, jeera, Castor seeds, soy seeds, castor oil, refined soy oil, soymeal, crude palm oil, groundnut oil, mustard seed, cotton seed, pepper, red chilli, jeera, turmeric and cardamom, chana, urad, yellow peas, tur dal. |
| Metals and materials | Base metals: Aluminum, copper, nickel, zinc, tin. Bulk commodities: Iron ore, coking coal, bauxite, steel |
| Energy | Crude oil, Brent crude, thermal coal, natural gas |
| Services | Oil services, mining services and others. |
Commodity Is Little Different Than Equity
As we discussed above there are various things which are different in the commodity market. In the commodity market, there are no companies which have listed their stocks through an IPO, but these are the commodities which don't have a specific stakeholder. Therefore, equity investors often ask - how to analyse the potential of a commodity? Like in equity, in commodity there are no financial statements through which you can determine the financial standing of the company. The rates of commodities are entirely dependent on the demand and supply of the commodity. All the commodities, be it agricultural products or metals, go through daily price fluctuation only because their demand and supply keep changing from time to time. That's why traders who can catch the pulse of the changing rates of the commodities can make enormous profits from commodity trading.
Technical Analysis: Traders' Favourite Tool For Analysis
Commodity traders rely heavily on the charts for analysis. All the commodities and their price movements can be tracked on charts. There are various types of charts i.e. line charts, candlestick charts, etc. Similarly, there are various indicators and oscillators which help to identify the trends and reversals which are important to ascertain entry and exit points.
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