What is commodity trading Commodity trading is trading of commodities such as metals, crude oil and agricultural products. It is similar to share trading in some aspects. Main difference in the equity and commodity trading is the products involved. commodity trading deal with trading in different materials . As in share market the traders trade in financial instruments like shares and Mutual funds, in the Commodity trading the traders trade in various goods such as Metals, Cattle, Agricultural products, Petroleum products etc. like other markets the commodity market is also driven by the demand and supply. The goods need to be purchased in the situation when the demand is less resulting in low cost and sold with profit when the demand in market is usually high resulting in increased prices. The trading is basically done by paying the a part of price of the commodity and the leverage is provided by the broker. As this trading involves the use of margin provider by the broker, the risk and rewards are high. One major difference from equity trading is the timings of the trade. Commodity trading time in India is 10:00 AM to 11:30 PM with the exception of agriculture related commodity. For these goods the time is up to 05:00 PM. The documents such as Identity card and PAN card are needed for the KYC.
Commodity trading is done on platforms like Multi commodity exchange, National commodities and derivarive exchange, National multi commodity exchange, Indian commodity excahnge etc. Among the above mentioned exchanges, Multi Commodity exchange is the most popular of all and most of the invester trade on this platform . SEBI is the chief controller of commodity market in India.
How to do the trading The basic requirement is a trading account. Many DEMAT account providers such as Zerodha and Motilal Oswal gives us the option of opening Trading account which can be used for commodity trading with share trading. One can opt for only commodity trading account also. For doing the trading, it is not required to pay the full price of the commodity. Only a margin of the price is paid and the price of margin depends on the price of the lot(One complete unit). The profit and loss depends on the price fluctuation of the commodity purchased. One can trade in Metal such as gold and silver also by paying a margin of the actual price. A minimum amount of 5000 Is needed to start with the trading. KYC(Know your customer) has to be done if the account is opened for the first time.
Risks involved Just like any other trading, commodity trading also comes with some risks. The risk and reward ratio in commodity trading is high because the trading is performed in the form of future trading same as share market. Here a buyer has to guess the future price and buy by paying the price of the margin. In this kind of trading the chances of gaining and losing is more. One has to be aware about the price fluctuation and the factors affecting price fluctuation in the market to make profits and to avoid losses. The various factors such as Weather change, change in governments policy and increased demand of a particular product are responsible for increase or decrease the price of a commodity. Regular updates through news related to finance and newspapers should be taken for getting and edge in commodity trading for trading to get profits.
ConclusionCommodity trading is a good option for people who are keen to earn some extra money and boost their income. It can be done by the people who are existing share traders as well as those who want to start new trading. So if you want to get some extra income and learn a new earning opportunity then commodity trading is definitely a good choice for you. For newbies its advised to do it under the expert supevision and to start with small amount of cash to avoid potential losses due to lack of knowlege.
A nice article giving the basic details of commodity training.
The agricultural products have different yields in the different years and their absorption in the wholesale market accordingly takes place fixing their wholesale prices. Though Govt assures to give a minimum floor price sometimes other factors also prevail to create unexpected fluctuations. Other commodities will be having their prices based on their requirement and demand in the industries and other applications. So, the person who wants to try his luck in the commodity market has to visualize so many factors and aspects before making a bid for buying or selling of a particular commodity in the commodity market.
For example a few years ago the gold was considered to be a healthy investment and its price usually escalated with time. But what we are observing today is that for quite some years it is not happening like that and it is a stagnant commodity. More or less, the same behavior is being depicted by the other precious matter that is Silver.
What I want to emphasize is that commodity trading also requires a lot of pondering and prudence for taking the decisions to buy a bulk of commodity portfolio for earning returns on an opportune time.