Starting commodity trading in India is slightly different from the stock market trading. Trading in commodities is beneficial if you have a lot of patience because only a few trades happen in a minute as compared to frequent price changes (that blinks) in intraday stock trading.
You need to understand the cyclical nature of the commodity that you want to trade. Else you can select a more universal commodity like crude oil and natural gas that are most liquid and get traded in all the global commodity exchanges.
The natural gas commodity trading chart, that is liquid, looks like this;
But, this is not the case with certain other commodities, for example, rubber trades very thinly which can be observed from the chart below.
Similar is the case with Mentha oil trades.
In the case of such commodities, you need to understand the seasonality, demand-supply of the commodity and need to be patient to be successful in commodity trading.
You can trade in the commodities market after coming back home from work and even after having dinner. The commodity markets are open from morning 9:00 am up till 11:30 pm in the night as compared to stock markets that close at 3:30 pm.
Commodity traders are settled in cash, you do not need to take delivery of the physical products.
In India, commodity trading happens in commodity Futures and Options only. There are at least 4 to 6 futures and options contracts available at all times for trading in most of the commodities.
Before we get into the detailed nitty-gritty of commodity trading, you need to know what commodity trading means and how you can get started with commodity trading.
What is Commodity Trading in India
In simple terms, commodity trading is buying and selling of commodities (products) that we consume (use) in our daily life like coffee, silver, aluminum, cotton, black pepper, gold, zinc, crude oil and natural gas.
The products are not physically traded on the commodity exchange, but you have the option to own them physically if you opt for delivery instead of cash settlement.
In India, most of the commodity trading happens in commodity futures and options. That means you will be trading in derivative products that have a higher risk than the underlying commodity itself.
Commodity trading is for those who want to diversify their portfolios beyond shares, mutual funds, bonds, ETF and real estate.
Types of Commodity Market in India
Multi Commodity Exchange (MCX) is the largest commodity trading exchange in India. As per MCX, the commodity market is categorized into four types, as under.
#1. Bullion Commodity Market
Bullion is the bulk gold or silver maintained in the form of bars. Instead of owning gold or silver in the physical bar form you can trade in bullion and earn from the price fluctuations.
The various gold bullion contracts that you can trade on commodity exchanges are – Gold, Gold Mini, Gold Guinea, and Gold Petal contracts.
The gold futures contract comprises a 1Kg trading unit (1lot) of gold. Whereas the Gold Mini futures contract contains 100 grams, Gold Guinea contains 8 grams and the Gold Petal futures contract comprises 1 gram of trading unit of gold.
The silver bullion contracts include – Silver, Silver Mini and Silver Micro contracts.
The trading unit (1 lot) of silver is 30 kg whereas the Silver Mini futures contract is of 5 kg and Silver Micro of 1 kg silver.
#2. Base Metal Commodity Market
The base metal contracts available for trading on MCX are Aluminum, Copper, Lead, Nickel and Zinc.
Whereas, diamond and steel contracts can be traded on the Indian Commodity Exchange (ICEX).
#3. Energy Products Commodity Market
Commodity trading allows you to profit from the price movements in energy products like – Crude Oil, Natural Gas and Brent crude oil that is otherwise impossible to buy.
You can not take possession of these commodities but can trade on the commodity exchanges in an electronic form.
#4. Agri Commodities Market
MCX and National Commodity and Derivatives Exchange (NCDEX) offers trading in Wheat, Maize, Paddy, Black Pepper, Cardamon, Castor Seed, Cotton, Crude Palm Oil, Cotton, Mentha oil, RBD Pamolein, Castor, Chana, Coriander, Guar gum, Turmeric, Jeera and others.
How Commodity Market Works in India
Commodities are rarely traded in physical form on the commodity exchanges in India. This is because of the need to maintain commodity quality, logistic problems and warehousing difficulties.
Instead the commodities are standardized into specific futures and options contracts which denotes the ownership of the underlying commodity. In sense, you get to trade on commodity derivatives rather than the physical commodity itself.
But if you wish to have underlying physical commodities, then you can opt for the delivery mode to settle the contract.
Commodity trading can happen in the commodity futures or an option contract. A commodity futures contract is a right and an obligation to buy or sell the underlying commodity at a predetermined contract price.
On the other hand, commodity options are the rights without an obligation to buy or sell. The put option is the right to sell and call options give you the right to buy.
The functioning of commodity markets in India involves three separate entities – the commodity exchange, clearing members & DPs and brokerage house.
You would like to read – How to do option trading in India
#1. Commodity Stock Exchange
The commodity exchange provides the platform for commodity traders, investors and other participants like hedgers to help them buy/sell and take positions in different commodities.
The commodity exchanges introduce various commodity contracts in which you can trade. There are at least 4 to 6 contracts available for different commodities. These are near month, next month and far month contracts.
The one month contract that expires in the given month is the near month contract. For example, if today is 1st Jan 2022, then all the commodity contracts expiring on the last Thursday of Jan 2022 is the near month contract.
The next month contracts have a life period of 2 months (expiring on the last Thursday of Feb 2022) and likewise, the far month contracts have a life period of 3 months.
Apart from that commodity exchanges also introduce 6 months and 12 months futures contracts but those are rare and depend on the underlying commodity supply and demand.
#2. Clearing Member and DP
The clearing members are closely associated with the commodity stock exchanges and help in settlement of all the trades happening on the exchange. They take care of the risk management and the pay-in and pay-out of funds and securities.
Depository Participants (DP) help you to store all your securities (F&O contracts) in safe custody.
You will require DP services if you are doing delivery trades where you need to hold your securities till you sell them or till the last day of expiry when the security gets settled in cash or by physical delivery.
#3. Brokerage House
Brokerage houses are your normal stockbrokers who also provide trading in commodities. You can trade in commodities when you open a commodity trading account with a stockbroker.
The online platforms are connected to the commodity exchanges and help you buy/sell and take positions in commodities.
Commodity market timings in India
World wide commodities are traded 24 hours round the clock on various commodities stock exchanges like the New York Mercantile Exchange (NYMEX), Chicago Mercantile Exchange (CME) and London Metal Exchange (LME).
The prices of global commodities like crude oil and natural gas also impact the respective prices of commodities trading in Indian commodities exchange.
In India the commodity stock exchange works from Monday to Friday.
|Agri-commodities||09:00 A.M. to 05:00 P.M.|
|Bullions, Metals and Energy products||09:00 A.M. to 11:30 P.M.|
The bullion, metals and energy products are traded till 11:55 pm between every November and March.
Commodity Exchanges in India 2022
Presently, you can trade and invest in the commodity market in India on the following commodity exchanges.
#1. Multi Commodity Exchange (MCX)
MCX is the largest commodity exchange in India that accounts for over 90% of the total commodities trading.
MCX offers trading in Bullion, Base Metal (like aluminum, copper and zinc), Energy Products and few Agri commodities.
Most of the stockbrokers offer you commodities trading with MCX.
#2. National Commodity and Derivatives Exchange (NCDEX)
NCDEX is a dedicated commodity exchange for trading specifically in agricultural commodities.
You can trade in contracts related to 21 commodities that are categorized into Cereals & Pulses, Fibers, Guar, Oil and Oilseeds, sugar and spices (like pepper, turmeric, jeera and coriander).
#3. Indian Commodity Exchange (ICEX)
ICEX is a commodity exchange for trading in Agri and Non-Agri products. ICEX specializes in commodity trading of diamonds and steel. The agricultural commodities that you can trade on ICEX are Spices, Oil & Seeds, Plantations, Fiber and Cereals.
#4. National Stock Exchange of India (NSE)
SEBI has permitted commodities trading on NSE. The products that you can trade on NSE are limited to Gold, Silver and Brent Crude Oil.
#5. Bombay Stock Exchange (BSE)
On BSE you can trade in both Agri and Non-Agri commodities. But the trading volume is very low in comparison to MCX and NCDEX.
You can trade in non-Agri commodities like Gold, Silver, Copper, Zinc, Crude oil and Aluminium. The Agri commodities include trading in Turmeric, Guar seeds, and Cotton.
Terms Used While Doing Intraday Trading in India 2022
#1. Futures Contract
A legally binding agreement to buy or sell the underlying commodity at a later (future) date.
The futures contracts are standardized having specified quality, quantity, delivery time and location for each commodity. The price for the futures contract is only the variable on which trading happens.
#2. Option Contracts
Option contracts are a legal agreement that gives you the RIGHT to buy/ sell the underlying commodities at a certain price called the strike price.
Options contracts are also standardized specified quality, quantity, delivery time and location for each commodity.
#3. Market Order
Market orders are the current trading price of a commodity. When you place a market order then the buying/selling will happen immediately at the best price available.
For example, below are the pending buy and sell quotes for Crude Oil September Futures.
All the BID quotes for Crude Oil along with quantity (on the left) are placed by the buyers. If you want to sell Crude Oil then the market order (best available price) will be Rs. 5039.00 and the quantity available is 3 lots.
All the OFFER prices (on the right) are placed by sellers who are ready to sell Crude Oil futures at their given prices. You can buy a lot of Crude Oil futures immediately at Rs. 5040.00 by placing a market order.
#4. Expiration Date
The date on which a future or options contract automatically expires; (the last Thursday in India) the day on which an option may be exercised.
For example, the futures contract on “COTTON FUT 27 JAN 2022” will expire on Jan 27, 2022.
#5. Lot Size
Lot size is the number of units of underlying in a contract. For example, 1 lot of Gold futures contracts consist of 1000 grams (unit) of gold.
#6. Margins or Leverage
Margins help you trade larger volumes by keeping a small amount of money in your trading account.
For example, If you want to buy 1 lot of gold futures intraday with an order worth of Rs. 47,00,000 and you have only Rs. 4,70,000 in your account.
But if your stockbroker is ready to provide 10X margins, then you can place 4.7 Lakhs with your broker and use the margins to take a position (buy/sell 1 lot) in the gold worth of 47 Lakhs.
#7. Limit Order
Limit order helps you buy or sell commodities at a specific price that you are willing to trade. The trading platform will send your limit order to the commodity exchange marking your specified price.
For example, the current market price of Natural gas is Rs. 340.00. But you want to buy Natural gas futures at Rs. 338.50 then you can enter a limit order specifying your broker to buy futures of Natural gas at Rs. 338.50.
#8. Stop Loss Order
Stop-loss order protects you from the risk of continuing a loss trade. Let us understand from the example below.
Suppose, you have bought Gold futures at Rs. 47,000 for intraday trading. Naturally, you will want to sell them higher, let say at Rs. 48,000 and book profit.
But due to adverse market movements, the share price starts to decline and is trading at Rs. 46,750. Which means, at the moment you have an unrealized loss of Rs. 250. The price can move down further to Rs. 46,000 creating more losses.
The above loss situation can be prevented by placing a stop-loss order at Rs. 46,800. When you do that, the stop loss order gets executed at Rs. 46,800 booking a loss of Rs. 200. But the stop-loss order protected you from making further losses.
Check out – How to start forex trading in India
How to Start Commodity Trading in India 2022
#1. Choosing the Stock Broker
You can trade and invest in the commodity market in India through your regular stockbroker. You need to open a commodity trading account and a linked bank account for trading in commodities. Most of the top stock brokers also offer commodity trading.
Things that You must look while choosing a stockbroker are
- Brokerage charges
- Margins or leverage provided
- Annual fees & charges
- Trading platforms
The following are the best stock brokers that offer online commodity trading platforms that you can pick depending on your commodity trading needs.
|Rs. 20 per executed order||0.03% or Rs. 20 per executed order whichever is lower||Rs. 10 per order (Titanium plan)|
|3X intraday margins||50% of the normal (NRML) margin||Up to 2X intraday margins|
|Rs. 150 for commodity A/c opening||You get a single equity, F&O, currency and commodity account for Rs. 300||Rs. 999 per month plan charges|
|AMC on commodity A/c – Rs. 0||AMC – Rs. 300||AMC – Free|
|Upstox A/c opening||Zerodha A/c opening||5Paisa A/c opening|
#2. Opening a New Commodity Trading Account
You need to have the following documents to open a commodity trading account.
- Aadhaar Card
- PAN Card
- Canceled Cheque
- Cheque showing IFSC or MICR Code
- Income Proof (because you will be trading in commodity F&O)
If you already have an existing equity trading account then you need to activate the commodity trading. The details of which you can find in the next point.
But if you want to open a new commodity trading account then below is the stepwise procedure to open an online commodity trading account at Zerodha.
Click here to directly visit the quick Zerodha account opening page and follow the steps shown in the video
The other stockbrokers will also have more or less the same steps that you can follow.
#3. For Existing Zerodha Equity Trading Account Holders
If you already have an equity trading account with Zerodha, then you need to activate the commodity trading segment.
#1. Login to your Zerodha trading account and click the commodity activate tab
The manage segment page will open up showing trading segments that you have opted for.
#2. Slide the radio button for enabling commodity trading
#3. Fill in the income and experience details and Upload Income Proof
You will get a pop-up window to activate the commodity account. After providing income and experience details upload the income proof and click continue.
Zerodha approved my commodity account in 2 days. The commodity account activation at Zerodha may take up to 5 days.
#4. Login to Your Zerodha Account and Create a Commodity Watchlist
Watchlist helps you to track various commodities in which you want to trade from a single screen.
To create a watchlist click on the Watchlist tab on the top left of the screen and click on search/ add scrip.
Select the commodity option from the drop-down menu and type the commodity that you want to trade. The search option will give you a list of all the available commodity contracts that are available for trading.
Select the commodity contract and press the (+) button to add that particular commodity in your watchlist.
In commodity intraday trading the buy/sell or sell/buy sequence does not matter because in the end, you won’t get any commodity delivered to your account. Your commodity trades will get settled in cash.
#5. Placing Buy-Sell Orders For Commodity Trading in India
You can place buy or sell orders from two locations on the trading window.
From the watchlist
By clicking on the blue (B) for buy and red (S) button for a particular commodity located in the watchlist.
From the charts
You can also enter orders from the buy/sell buttons that popped up as shown in the charts above.
#6. Intraday Buy-Sell Commodity Trading in India
Suppose, you have a view that the September, Natural Gas Futures contract will move up during the day. Then you can do buy-sell intraday trade, i.e buy at a lower price and sell at a higher price to make a profit.
Click the buy option and then you can enter a buy order at the market price of Rs. 336.80 as shown below.
Select the lot size, intraday position, order type (regular) and the order as a market order. Press the buy tab to place the order.
Wait for a few minutes for the order to get traded. A pop-up will appear when your order will get traded.
You will also get the order details in your order book.
The natural gas futures price went down a bit and our buy order got executed at Rs. 336.70. You can also view your intraday position in the “Position” book.
Wait for the price to move up when you can sell the Natural gas contract and square off your trade. You will earn a profit because you had bought at a lower price and sold the Natural gas contract at a higher price.
Click on the “Exit 1 position” tab as shown above to close (sell) your already existing Natural gas futures contract.
When you click on the “Exit 1 position” tab a pop-up order confirmation will appear.
Click on the “Sell/Confirm” tab to sell (square off) the position. Finally, you can check the order details in the “Order” book as shown below.
You also have the choice to convert your intraday position into delivery. For that, you need to click on the “three dots” appearing before quantity and select the option convert from the dropdown menu.
Suppose you sold the Natural gas futures contract at Rs. 337.90 then you have earned Rs. 1.20 per unit of Natural gas.
The lot size of Natural gas futures contains 1250 units. Thus you end up making a profit of Rs. 1.20 x 1250 = Rs. 1,500 on your Natural gas futures intraday buy-sell-trade.
#7. Intraday Sell-Buy Commodity Trading
In a similar way, you can do a sell-buy trade when you have a view that a particular commodity contract price is going to fall.
For example, if you view that the Crude oil prices are going to fall then you can first enter a sell order (even without owning) and then later buy the contract at a lower price and make a profit.
Select the Crude oil contact in which you want to trade and click on the sell button.
Check the order position to intraday, select order type (regular) and the order as the market. Click on the sell button to enter the order.
Confirm the order details before you place the sell order. You have sold 1 lot of Crude oil futures contracts at Rs. 5054.00.
According to your view, wait for the crude oil prices to fall further.
When the price has come down substantially, then you can close the trade by squaring it off, meaning you will be buying the same crude oil future contract at a lower value.
Suppose you have bought the Crude oil contract at Rs. 5050.00, then you have made Rs. 4 profit on 1 unit of Crude oil.
One lot of crude oil futures contracts have 100 units, so your profit will be 4 x 100 = Rs. 400 from the sell-buy trade of Crude oil futures contract.
Best Commodity Trading Tips in India 2022
#1. Select Commodity Which You Understand
Demand and Supply of commodities impact their prices greatly. The demand and supply situation is affected by a host of economic, seasonal, political and weather conditions.
You need to understand all of the factors impacting a particular commodity price. Take time to understand those factors and choose the commodity for trading that you understand properly.
#2. Have Patience & Strategy While Trading Commodities
Commodities markets do not trade as frequently as compared to the stock markets. Except for global commodities like Crude oil and Natural gas, very few trades happen for other commodities in India.
You need to wait patiently for your trades to get executed. This also means that you need to have a defined buying and selling level in place so that you do not get stuck with a particular trade.
#3. Use Margin Carefully
Commodities trading involves using Futures and Options contracts that are derivatives of the underlying commodities.
Even the single lot size is worth lakhs of rupees. For example, a single lot of crude oil contracts at a price of Rs. 5050.00 is an order worth Rs. 5,05,000. To trade such volumes you need margins, i.e. borrowed money from your broker.
Your broker may provide you higher markings like 10X and 20X Margins. Any adverse price movements can cause a substantial loss. So you should use adequate margins.
#4. Always Trade With Stop Loss Order
Stop-loss is a risk containment strategy that prevents you from making larger losses. Commodity markets have large price volatility.
Any adverse price movements can result in substantial losses capable of eroding all your trading capital. Hence, you should always trade with a stop-loss order.
#5. Capture Small Price Movements
Instead of waiting for a single large price movement that may or may happen, you can keep in trading by capturing small price movements.
Capturing small price movements will save you from greed and impart disciplined trading habits.
Commodities trading is not that difficult for people who understand the risks and are willing to devote some time to study the underlying factors.
Commodity market trades in contracts that have fixed expiry and are available only for the short-term. If you are looking to diversify your portfolio with an asset class that is for the short-term, let’s trade up till late in the night then commodity trading is for you.