An Overview on Commodity Futures Trading in India |
Posted: March 13, 2019 |
Commodity market plays a major role in the global economy and growth in countries. The commodity futures trading in India is quite old – may be as old as in the United States. Bombay Cotton Trade Association Ltd. was India’s first organized futures market. Since then commodity plays a major role in the economy of the agriculture-based country – India. But, here we aren’t going to discuss the history of commodity futures trading in India but how one can trade in commodity futures in India, what commodities you can pick to trade, and what are the factors that affect the commodity prices in India. Do you remember the ban on commodity trading which lifted in 2003? Well, you don’t need to answer that. Our point is, the moment the ban lifted from the commodity market, the more and more people got invested in the new asset class. Now, many retail investors already invested in the commodity market and keeping commodity asset class in their equity-based portfolio. Seeing this, many novice investors are planning to trade in commodity futures in believing to receive high profits in no time. It is agreeable that commodity trading provides high returns but it is also true that the commodity market is very volatile. Besides, there is leverage. Any misstep and you could lose your entire capital in no time. Who Should Trade in Commodity Futures?Like we said earlier, novice investors who have no experience in trading in commodity market should avoid trading in it. Only those who are familiar with the price dynamics of commodity market should only go for leveraged positions since any misstep can erode all our capital within seconds. So, experience and a good set of commodity knowledge are utmost needed in trading commodity futures in India. Even so, if you would require a PAN Card, photo identification, and address proof with your salary details to register for commodity trading in India. Once you fulfill your KYC (Know Your Customer) with the brokerage, sign all the necessary agreements, you can start commodity futures trading in India. Where to trade in Commodity Futures?To do commodity trading online, an investor has three exchange options – MCX (Multi-Commodity Exchange), NCDEX (National Commodity and Derivative Exchange), and NMCE (National Multi-Commodity Exchange of India Ltd) etc. To trade in commodity futures, one has to buy or sell commodity futures contract which is standardized contract traded electronically and settled in cash. In terms of commodity trading, “commodity futures contract is an agreement to purchase or sell a specific amount of commodity in the future at an agreed price.” The Securities & Exchange Board of India (SEBI) is the regulatory body of the commodity market. When an investor buys commodity futures, he/she doesn’t have to pay the full price of the contract and can take leverage to buy a commodity futures contract. This contract varies with the commodities. For instance, if an investor decides to do commodity futures trading in crude oil mini then he/she has to pay a certain amount as the margin. The margin range from 5-10% percent of the value of the crude oil mini contract. So, if the price of crude oil mini of a single unit is Rs. 4000.00 then to trade in crude oil mini you would need a minimum margin of Rs. 4000.00 in your trading account. It is because to trade in commodity futures in India you need to buy the entire lot. Similarly, the price and trading lots vary from commodity to commodity. Listed Commodities on MCX
Listed Commodities on NCDEX
Apart from this, the other commodities are Kapas, 29 MM Cotton, and Sugar M etc.
What Factors Influence the Commodity Prices in the Market?When it comes to fluctuation at the commodity prices, the demand and supply are one of the prominent reasons for major fluctuations in the commodity market. Apart from this the weather, social changes, government policies, and global economic data influence the commodity prices very much.
Final Thoughts: -Commodity futures trading is done through futures contract to buy or sell the commodity at a certain time in future at an agreed price. This is like a double-edged sword which also can bring both profits and losses to the investors. The risk factors in commodity futures trading in India are no different than the risks associated with the futures trading in the equity market. So, it would be advisable to keep your research and analysis up-to-date when trading commodity futures.
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