India has had a long history with commodity trading. It started way earlier than many other countries and goes way before stocks or bonds. However, given India’s shaky geopolitical history and the government’s wavering support, it took a back seat. It is slowly regaining its importance in recent times.
There are six major commodity trading exchanges in India as listed below.
- Multi Commodity Exchange – MCX
- National Commodity and Derivatives Exchange – NCDEX
- National Multi Commodity Exchange – NMCE
- Indian Commodity Exchange – ICEX
- Ace Derivatives Exchange – ACE
- The Universal Commodity Exchange – UCX
Just like the SEBI is the custodian of the Indian Securities Markets, the Forward Market Commission (FMC) was responsible for the commodities. However, the two merged in 2015.
As a general rule of thumb, commodities are classified into four types. The first category is metals that include Silver, Gold, Platinum, and Copper, followed by energy comprising crude oil, Natural gas, Gasoline, and Heating oil. The other two are Agricultural commodities like Corn, Beans, Rice, Wheat, etc., and finally, there is Livestock and Meat which includes Eggs, Pork, Cattle, etc.,
How do we trade?
The best way to invest in commodities is through futures (they are available for almost every commodity category). They can be used effectively to prevent the risks associated with price swings.
Trading in futures has many advantages as well as disadvantages. The Future market is very liquid and there is huge scope for upside if traded correctly. In terms of the technical requirement very low balance is required to trade in commodity futures.
At the same time, investors must be aware that the futures market is extremely volatile and of high risk, since there can be considerable price movement before a position is closed.
There are other ways of trading commodities too such as using Exchange-traded funds (ETFs) and exchange-traded notes (ETNs). As the stock market, they can be used to exploit gains from price movement without investing in the asset, in this case, the commodity itself. An indirect way of investing in commodities is through mutual funds – this can be done through investing in companies whose operations rely heavily on commodities such as agricultural or mining companies.
Lastly, investors can use the MCX trading platform for this purpose. It performs the same functions that the BSE performs for stocks.
Why trade commodities?
For most people commodities are a way to effectively diversify their portfolio beyond the typical securities. They are particularly useful in times of stock market volatility as they tend to move opposite to stocks.
Though it is a market heavily plagued with uncertainty – the demand and supply movements of commodities often are affected by things like unusual weather patterns, epidemics, and disasters both natural and human-made which one cannot predict or control – yet they have become a very valuable tool to hedge one’s portfolio.
Other factors that affect commodity prices are global economic developments and technological advances, especially for the metals sector. An event that tipped the scale in Asia’s favor when it came to commodity trading was India, and especially China’s meteoric rise to becoming global manufacturing hubs. This led to an increased demand for metals and a reduced supply that caused their prices to surge and hence brought about a commodity boom.
Investors should also be aware of other macroeconomic factors such as decisions taken by the OPEC (Organisation of Petroleum exporting countries) that affect prices of commodities belonging to the energy category like crude oil.
For the agricultural sector, investors should be wary of unpredictable weather conditions and account for the risk accordingly. An opportunity to exploit here is in territories with high population growth but limited agricultural supply.
Why should you educate yourself?
Like mentioned, a lot of aspects of commodity trading cannot be predicted. This should be viewed as an opportunity rather than a threat. With the correct knowledge, one can exploit this opportunity to the fullest. Thus it is most lucrative for beginners to start with a commodity trading course. A good commodity trading course will first explain critical concepts, then build a solid foundation and go into the more advanced topics. Side by side you will learn to practically apply these theories in your investing/trading journey. There are various ways to analyze commodity patterns such as using technical analysis, demand and supply trends, and global macroeconomic indicators. An extensive commodities trading course will help one gauge the correct parameters that one can base their actions on and keep a healthy risk-reward ratio.
Through a good course, one can also get a decent understanding of the regulations around commodity trading and make better decisions. Lastly, they will also help build the correct mindset required for this journey. Psychology plays a huge role in any kind of security or asset trading, and mastering one’s emotions is enough the difference between a professional and a novice. Thus one should not compromise on the quality of resources they use to educate themselves.