Commodity trading is an interesting option for those who wish to diversify from the traditional options like shares, bonds and portfolios. The Government has made almost all commodities entitled for futures trading. Three multi commodity exchanges have been set up in the country to facilitate this for the retail investors. The three national exchanges in India are:

• Multi Commodity Exchange (MCX)
• National Commodity and Derivatives Exchange (NCDEX)
• National Multi-Commodity Exchange (NMCE)

Commodity trading in India is still at its early days and thus requires an aggressive growth plan with innovative ideas. Liberal policies in commodity trading will definitely boost the commodity trading. The commodities and future market in the country is regulated by Forward Markets commission (FMC). Commodity derivatives are traded on the National Commodity and Derivative Exchange (NCDEX) and the Multi-Commodity Exchange (MCX). Gold, silver, agri-commodities including grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities that these exchanges deal in.

Commodity futures market allows the commercial producers and consumers to offset the risk which arises out of the movements in prices of the commodities that they trade. Commodity trading exchanges encourage the speculators and this is done so that a liquid market can be facilitated in order to help the consumers and the producers to freely buy or sell contracts. The speculators have one specific objective and it is to make profit by taking on the price fluctuations which is not generally taken by the consumers. There are possibilities of high rewards for the speculators because the possibility of loss is also substantially high.

Wholesale Market

The wholesale market in India, an important component of the India commodity market, traditionally dealt with framers and manufacturers of goods. However, in the present scenario, their roles have changed to a large extent due to the enormous growth that the economy has witnessed. The lengthy process of wholesalers buying from manufacturers; then selling it to retailers who in turn sold it to consumers does not seem feasible today. An improvement in the transport facility has made the interaction between the retailer and manufacturer easier; the need for a wholesale market is gradually diminishing.

Retail Market

The retail market in India is currently witnessing a boom. The growth in the India commodity market is largely attributed to this boom in the retail market. Policy reforms and liberal government policies have ensured that this sector is growing at a good pace. Some of the reasons attributed to the growth of retail sector in India include the large population of the country who has an increased purchasing power in their hand. Another factor is the heavy inflow of foreign direct investment in this sector. More than 80% of the retail industry in the country is concentrated in large cities.

Requirement to start trading:

Like equity markets, you have to fulfill the ‘know your customer’ norms with a commodity broker. A photo identification, PAN and proof of address are essential for registration. You will also have to sign the necessary agreements with the broker.

Factors that influence the commodity prices in the market:

The commodity market is driven by demand and supply factors and inventory, when it comes to perishable commodities such as agricultural products and high demand products such as crude oil. Like any market, the demand-supply equation influences the prices.

Variables like weather, social changes, government policies and global factors influence the market.

Directional trading and Day trading:

The key difference between commodity markets and stock markets is the nature of products traded. Agricultural produce is unpredictable and seasonal. During harvesting season, the price of these commodities is low as supply goes up. There are traders who use these patterns to trade in the commodity market, and this is termed directional trading.

Day trading in commodity markets is no different from day trading in the equity market, where positions are bought in the morning and squared off by the end of the day.

How to keep updated?

Most commodity trading firms have a research team in place that prepares commodity charts and conducts detailed study on the trends of the commodity in question.

Investing strategies based on this research are usually provided to clients.

They usually provide daily market reports before the market opens and intra-day calls during trading hours, along with monthly and weekly research reports.

Advantages of commodity trading:

There are various advantages of commodity trading which are listed below:

• Margin leverage: Commodities operate on the margin and this means that only a fraction of the total value (in cash) needs to be there in the trading account for taking a position.
• Commission cost: Buying or selling one commodity futures contract is cheaper than buying or selling the underlying instrument.
• Liquidity: Since the speculators are involved in commodity futures trading, the futures contracts are reasonably liquid. However, the contract which is being traded determines the liquidity. For example e-minis (which are electronically traded contracts) are the most liquid ones whereas the commodities which are pit traded like corn, orange juice etc. are not readily available and are more expensive than the others.
• Benefit from speculation: Commodity futures contracts can be sold as easily as they can be bought. This means that the speculators can very easily make profit by speculations regarding the falling or rising market.

Disadvantages of commodity trading:

There are several disadvantages as well which are discussed below:

• Margin leverage can also be harmful. In case of low margins, there are possibilities of poor money management and this can lead to high risk.
• Since traditionally the commodities are pit traded there are risks of spillage and also the time consumed is a factor that needs to be considered.

What Risk Factors are involved in Commodity Trading?

Profits and losses in commodity trading are quite uncertain. This is usually done in the form of futures. Thus, commodity trading also involves similar risk factors like that of future trading in equity markets.

Despite risk factors, commodity trading is preferred by investors who like to take risks so as to earn high returns even when trends are unpredictable.

India Commodity Market – Global Scenario

Despite having a robust economy, India’s share in the global commodity market is not as big as estimated. Except gold, the share in other sectors of the commodity market is not very significant. India accounts for 3% of the global oil demands and 2% of global copper demands. In agriculture India’s contribution to international trade volume is rather less compared to the huge production base available. Various infrastructure development projects that are being undertaken in India are being seen as a key growth driver in the coming days.