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INDIAN-COMMODITY-MARKET trading explained

ON this article, we’ll be learning about the trading operations in indian commodities market.For the beginners, I’ll try to keep things simple here & will not complicate this article with detailed core informations regarding commodity market here. I’ll be sharing informations only at a level which is required for you to start trading commodity market & once you spend some times trading in this market real-time,you’ll come to know the detailed features automatically over time & situations.

Firstly, I strongly recommend you to learn about indian stock market trading first before you try your hands on commodity market as it helps you to understand better commodity market operations.So, if you’ve missed my article on indian stock market trading operations,then pls click to read it here.

To understand commodity market key functions, we need to understand the concept of cash market or equity market,future market,lot size,expiry cycle,exchanges,demat account,trading a/c,broker,commissions etc terms and if you’ve understood article written on indian share market,you must have understood all these concepts hence I’m not going for another detailed explanations of all these terms as I already did that in stock market article.

Lets start,

As the name suggests,in commodity market, we trade only commodities – simple !!!!!!!!! we trade commodities what we use in our daily lives like : gold,silver,wheat,corn etc.

There are two different category of commodities we have to trade:

Agricultural commodities  &  non-agricultural commodities

In agricultural commodities we trade : chana,wheat,corn,pepper,turmeric,dhanya,chilli,jeera,cardamom,cotton,sugar,mentha oil,potato,soya complex.mustard seed,crude palm oil,castor seed etc.

In non-agricultural commodities we trade : gold,silver,copper,aluminium,steel,nickel,led,zinc,crude oil,natural gas etc.

So , isn’t it amazing that, we can trade in market to make money in all those household things what we use in our daily lives !!!!!!!!!!

Lets get into trading part now:

To trade in this market , we need to open a demat & a trading account which can be opened by a broker as how we discussed in our stock market trading article.

Like in stock market, we have exchanges under whom all the trading procedures take place, sameway there are specific exchanges we have for commodity market trading, where all the commodities are listed like shares of companies are listed in NSE & BSE exchanges.

There are 24 commodity exchanges in India & there are three national level commodity exchanges to trade in all permitted commodities. They are:

Multi Commodity Exchange of India Ltd, Mumbai (MCX)

National Commodity and Derivative Exchange, Mumbai (NCDEX)

National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)

Mostly people trade commodities listed in MCX, as it is more popular than other exchanges. Different number of commodities are listed in different exchanges here, but since most people trade in MCX hence it is more liquid & it is advisable to trade under that exchange only.

So we know two things till now : we’ll have to open accounts with a broker & then we’ll be trading commodities listed under an exchange like MCX. When you open an account , you receive a trading software where you’ll be trading all the commodities the same way how we’ve seen trading stocks on the screen in stock trading article. Have a look, how the commodity market looks like on screen :

 Commodities can be traded in three ways in market :

1) trade(buy/sell) commodity in future market format

2) buy commodity in physical format

3) buy commodity in demat format

90% people trading in commodity market, use no.1 (future trading) way to trade this market.

TRADING COMMODITY FUTURE :

If you’ve read my article on share market trading, you all know by now what is future market & the features of it. Again I’ll have a quick revision on what we learnt,

In future market, we do not need to pay the full amount for what we buy. We just pay a margin percentage of what we buy. Like here in commodities future market, if we want to buy 10grams of gold , the total amount we are buying is Rs 268820/,but we do not need to pay the full amount to buy 10 grams gold. We’ll have to deposit 5% of total amount which is Rs 13450/ & we can get all the benefits of buying 10grams gold worth rs 268820/. Since we are buying gold on credit, there are certain criteria we’ll have to fulfill as defined by exchange like :

LOT SIZE : you cannot buy qty of gold as per your wish like 1kg,2kg etc. Exchange defines minimum unit of gold to be bought while trading future.  There are two different lot size they define for gold like :

= you will have to buy 1kg or 100 grams gold which means if you buy 1kg gold at 26800 & book profit once it reaches 26900,you made a profit of Rs 10000/ ( points gain in gold is 100 * 1 kg or 100grmas unit ).So every one-tick up or down,you will be gaining & loosing Rs 100/.If you trade with 10 grams gold,for every tick up or down,you'll be gaining or loosing Rs 10/.

Same way, for every commodities lot sizes are defined & you must know it .Here is a screenshot of lot size & margin requirement list below as per dec-2015 :

margin-1 margin-2

 

EXPIRY CYCLE :

When we trade commodities in future using margin, we cannot hold it as per our desire !!!!!! For every contract of commodity we trade, there is a timeline for that contract to be expired. So when we buy a commodity future contract , we’ll have to sell it off within the contract’s final date or else it will be sold automatically by the exchange. On below video, I have shown you how the commodity future looks like with the contracts timeline as well as the lot size,etc.Have a look :

POSITIONAL & INTRADAY TRADING:

Both positional & intraday trading is allowed in commodities future .To know more about position & intraday trading terms pls refer stock market article.

LONG & SHORT trading :

Both LONG & SHORT trading is allowed in commodities future .To know more about position & intraday trading terms pls refer stock market article.

Lets talk about BUYING COMMODITY IN DEMAT FORMAT :

We’ll require a DEMAT a/c in case we want to buy commodity in demat format where you need to pay the full amount of what you buy like equity shares. This sort of facility is provided by a different exchange called NSEL (The national spot exchange ltd) where investors can buy commodities in a small denomination like you can buy 1g of gold or 100g of silver & keep that much unit deposited in your demat a/c.Later, whenever you feel like selling those commodities ,you can do so.There is no fixed timeline to hold these kind of investment here. These format of commodities are called “E” series commodity & Only seven different commodities are allowed for this sort of investment & they are :

e-Gold,e-silver,e-copper,e-zinc,e-lead,e-nickel,e-platinum.

BUYING COMMODITY IN PHYSICAL FORMAT :

Once we buy commodity in future segment using margin & then if we plan to take physical delivery of that contract instead of keeping it in future segment & settle in terms of cash.In this scenario,our bought commodities will be kept in exchange’s authorized warehouse as a deposit & will be sold from the warehouse later on.

So, even though we have three different ways to trade commodity market, future market is the most popular segment used by traders to make money here.I, personally trade in future segments only in commodity market.

 A few key points :

What are the trading hours?

Normal trading hours for Commodity market is from 10:00 am to 11:30 / 11:55 pm. However, Agri Commodity allows trade till 5:00 pm only. While the rest (Metals / Energy / Bullions & Steel) will open for trade from 10:00 am to 11:30/11:50 pm.

Can my Equity Demat Account be used for Commodities?

No, you can not use your Equity Demat account in Commodities and vice-versa. You have to open a separate Demat Account with CDSL & NSDL.

What are the govt charges to trade in Commodity Futures?

As of today, the charges to trade in Commodity Futures include Stamp Duty, Turn Over Charges and Service Tax.

Is options trading in commodities allowed?

No, options trading in commodities are not allowed yet.

Is there any limit to which price of a commodity can rise or fall in a day?

Yes, there are circuit limits or daily price range (DPR) to safeguard the interests of general investors from the extreme volatilities in markets for preventing any unexpected fall or rise beyond a limit.

Is there any limit to the quantity I can trade / hold in any given commodity at any point of time?

Yes, there is a maximum permissible limit on holding a particular commodity for client as well as member. It varies from commodity to commodity and exchange to exchange.

BROKERAGE STRUCTURE :

Broker charges around 0.02% as his commissions on your total transactions & I will recommend you to open an a/c with a broker who provides you brokerage 0.02% or lower than that.

Finally, a few important lines for beginners in this market:

As a starter, you should open a trading account first with the help of a broker.Choose you broker carefully as if he misguides you,you can face lot of problems in your initial days.So choose a good branded broker rather than going for some random brokers.I'll suggest you to open your accounts under a broker's branch office & not under a franchisee shop of that broker.If you can open your account in the broker's main branch office ,nothing better than that as you'll get the best service from there.

So, what we discussed above are the basic understandings of indian commodity market trading & Once you're tuned up with the basic ideas we discussed here,i'll suggest you to read the article regarding TECHNICAL ANALYSIS. As you'll have to learn technical analysis next, to know which commodity to trade & where to buy/sell.

January 4, 2015

2 responses on "INDIAN-COMMODITY-MARKET trading explained"

  1. Thank you for sharing commodity related information beginners. I will help as a guidance to commodity Traders.

  2. Thank you for sharing this commodity market related information for beginners. It will help to commodity trader as a guidance.

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