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A New Trend in Trading

Commodity trading is a common term in investment parlance. Apart from stocks, various commodities are traded in markets, investing in which can help you diversify your portfolio and augment gains. If invested with prudence, commodities can provide good returns in the long run thanks to their changing prices over time. A commodity is a group of goods that are important in everyday life. Commodity can be in the form of food, energy, metals etc. Commodities can be moved from one place to another physically.

Even today in villages, farmers exchange commodities among themselves. In the organized commodity trading world, things are a little different. Commodity trading is regaining its importance among investors. This trading happens on a commodities exchange, where various commodities and their derivatives products are bought/sold. The most commonly traded items are agricultural products and contracts based on them. But, increasing non-agro commodities are also being traded like diamonds, steel, energy items etc.

Categories of Commodity Exchanges

Here are the list of major commodity exchanges in India.

MCX

Multi Commodity Exchange (MCX) is the largest commodity trading market in India. It allows trades on Bullion like Gold, Energy like Natural Gas, Agricultural Products like Castor Seeds and Metals.

NCDEX

Natural Commodity & Derivatives Exchange Limited (NCDEX) is a deemed stock exchange regulated by SEBI. It allows trading in Cereal & Pulses, Fibres, Spices, Oil & Oil Seeds, etc.

ICEX

Indian Commodity Exchange Limited (ICEX) is a SEBI regulated online Commodity Derivative Exchange. It allows trading in Agro and Non-Agro Products in a nationwide trading platform.

NMCX

National Multi Commodity Exchange (NMCX) regulated under the guidelines of SEBO. It allows trading in Agro Commodities such as Cardamom, Cotton, Crude Oil etc.



Importance of Commodity Trading

The commodity markets in India are quite significant for the country’s economy, investors, and people relying on commodities for their living. Some of the most important features of the commodity markets are:

  • Price Discovery - These markets allow people to find the real prices of various commodities, including agricultural products in India. These markets ensure that commodities are not sold at a lower price, thereby preventing any losses.
  • Quality Maintenance - The commodity markets have strict requirements concerning the quality of commodities available for buying and selling. Such policies ensure the goods have superior quality throughout the country, benefitting suppliers as well as consumers.
  • Leverage - Trading in commodity futures is based on leverage through margin maintained with the broker. A big transaction can be performed with a much smaller amount of cash on hand.
  • Diversification - Trading in commodity markets in India is a great way for investors to diversify their portfolios. As commodities have an inverse relationship with bonds and equities, investing in commodities would safeguard the investor money if other markets fall.

Different Ways to Trade in Commodities

Trading in Commodity can be in different ways. Some of the ways of trading are discussed below:-

Direct Investment

It is the most common way to invest in commodities. For example, you can directly purchase items like gold and silver in the form of coins and jewellery.

Purchase Stocks

This is another way to trade in commodities. For instance, if you wish to trade in energy, you can buy it. The stock price will closely follow the price of energy.

Commodity, ETFs & Mutual Fund

There are many ETFs and mutual funds based on commodities and their is no purity or storage related issue as held in electronical format.

Bottom Line

Commodity trading can be beneficial if you get the basics right and accurately estimate your risk appetite. Have a proper plan and execute it to derive maximum value from commodity trading.



Pros of Commodity Market

Commodity Market carries along with it some advantages which are discussed below:-

  • High Growth Opportunity - It provides an opportunity to generate higher profits due to demand and supply in market.
  • Diversification - Diversification of portfolio protects from sudden lows and helps to keep portfolio stable by hedging to manage risks in markets.
  • Security against Inflation - Inflation can be very harmful for regular traders as it creates a surge in demand hence positive.



Cons of Commodity Market

Commodity Market carries along with it some disadvantages which are discussed below:-

  • High Volatility - Commodity market is highest volatile instruments making the market risky for some traders.
  • High Risk - It carries along with it own sets of risks hence it is very important to evaluate risk profile.
  • Leverage - Leverage can be a double-edged sword as it helps to control a big position with little upfront capital.