We all know about investing and trading opportunities in markets like equity, debt, and crypto, but another market that is gaining popularity recently is commodity trading. Just like equity and other instruments, commodities can be bought and sold. People buy commodities in anticipation of an increase in price, and when that target price is met, people exit their position and book profits. Obviously, the price can drop too which may result in a loss.
The trading of commodities in India takes place in two markets – the spot market and the futures market. The spot market involves all transactions in the present. That means that if you buy a commodity today, you will receive possession immediately on the basis of the price that it is trading on today.
On the other hand, the futures market (like the name suggests) deals with transactions in the future. It means that your transaction will be executed sometime in the future but on the price decided today.
In India, there are commodity exchanges including The National Commodity & Derivatives Exchange Limited (NCDEX), The Multi Commodity Exchange of India Limited (MCX), and The Indian Commodity Exchange Limited (ICEX). The National Multi-Commodity Exchange (NMCE) has been merged with ICEX. The trade timings of commodity exchange from Monday to Friday are IST 10:00 a.m to 11.30 p.m. / 11.55 p.m.
The National Commodity & Derivatives Exchange Limited (NCDEX) allows trading in commodities such as barley, chana, maize, moong, paddy (basmati), Kapas, 29 mm, cotton, guar seed 1 mt, guar seed 10 mt, guar gum, castor seed, cotton seed oilcake, soybean, refined soy oil, mustard seed, crude palm oil, sugar, pepper, turmeric, jeera, and coriander.
The Multi Commodity Exchange of India Limited (MCX) allows trading in bullion products (Gold, Gold Mini, Gold Guinea, Gold Petal, Silver, Silver Mini, Silver Micro), base metals (Aluminium, Aluminium Mini, Brass, Copper, Lead, Lead Mini, Nickel, Zinc, Zinc Mini), energy (Crude Oil, Crude Oil Mini, Natural Gas) and Agri items (Black Pepper, Cardamom, Castor Seed, Cotton, Crude Palm Oil, Mentha Oil, RBD Palmolein, Rubber)
The ICEX not just allows trading in Agri products, plantation (rubber), fiber (jute), but also commodities like diamonds and steel.
Now let us dive into the risk and reward profiles of commodity trading.
Commodity trading has many advantages. Commodity futures, being highly leveraged instruments, allow you to trade in them with relatively little money. You can thus take a bigger bet than you could with another asset class. These markets are also generally very liquid which makes entry and exit relatively easier. Lastly, they have a huge potential for profit too.
However, it comes with its own share of risk. They are extremely volatile at times (but that may be a plus for some traders). New investors should tread with caution. Everything tends to be magnified by leverage so only the smart and disciplined traders end up reaping the benefits.
The Commodity Derivatives Market Regulation Department (CDMRD) of the SEBI regulates the commodity market. Traders have to pay the commodity transaction tax (CTT). GST is also paid on brokerage on physical delivery of goods and on exchange charges and warehouse charges. There is also a stamp duty that needs to be paid.
Another market that one can venture into is trading currencies. Banks, corporations, central banks (like RBI in India), investment management firms, hedge funds, retail forex brokers, and retail investors, all take part in these markets. This market is called the currency or the forex (foreign exchange market).
One trades in these markets through currency futures – through a spot market for them also exists. Currency futures are traded on platforms offered by exchanges like the NSE, Bombay Stock Exchange (BSE), MCX-SX, and it usually happens from 9.00 am to 5.00 pm.
Trading currencies is slightly different than other asset classes. Here there is no actual delivery involved, and you trade in a pair of currencies. Suppose the INR/USD rate which tells us how many units of INR are required to buy a unit of USD. If one wants to bet on the INR rising, they will buy INR using USD. When the exchange rate rises as per your prediction, you can book your profit by selling the INR.
Currency futures are traded on platforms offered by exchanges like the NSE, Bombay Stock Exchange (BSE), MCX-SX. Currency trading usually happens from 9.00 am to 5.00 pm.
The point to note here is that trading in currencies can be extremely risky as there are a high number of variables involved. Using leveraged funds is not at all recommended, especially for beginners.
In conclusion, both commodity and currency trading can be extremely lucrative opportunities. One should try and pursue structured courses by industry veterans to gain insights and experience in the market.
But like it is said, execution is key – and it only through self-awareness can one succeed as a trader. So be aware of your goals and resources, as well as your risk-taking ability.