What is commodity trading, and how to start trading in commodities?

It takes hard work and dedication to succeed as an independent commodities trader. Here’s what you need to know.

What is commodity trading, and how to start trading in commodities?

In commodity trading, you buy and sell goods such as wheat, coffee, sugar, silver etc., i.e. goods that have value, are consistent in quality, and are produced in large volumes by multiple suppliers.

As with share investing, you can also trade in commodities online. The following part of this blog explains how a beginner can go about it; it involves five steps that the trader must take.

Step 1: Learn about commodity trading exchanges

As with the share markets, commodities too are traded on exchanges, called commodity exchanges, with India having 24. Three of these are national level commodity exchanges:

  • National Multi Commodity Exchange of India (NMCE);
  • National Commodity and Derivative Exchange (NCDEX);
  • Multi Commodity Exchange of India (MCX).

These three exchanges trade in all permitted commodities.

Related: Crude Oil, Gold, Or Copper: Which Are The Best Commodities To Trade In India?

Step 2: Select a broker or trading platform

A stockbroker in the share market would help you execute trades; likewise, a commodities broker can make informed decisions through recommendations. So, it is essential to select a broker registered with SEBI (Securities and Exchange Board of India). Be sure of the services offered and various fees charged (clearing fee, platform fee, commission, etc.).

There are several trading platforms such as Zerodha and Samco you could look at. The primary factor to look for in a commodity trading platform is cost-effectiveness. Also check if the brokerage charges are fair - that is, the fees shouldn’t eat into your profits.

You should also consider the app or trading platform’s user-friendliness, as well as the level of customer support offered.

Step 3: Open a commodity trading account

Next, you need to open a demat account. To do this, fill out an application form detailing the information required (age, income, financial status etc.) and share it with your broker. The latter will need to ensure you can pay off your dues if the market is down. The broker has the right to reject the application, but if the application is approved, the demat account gets opened instantly.

Related: 4 Alternative Asset Classes That Can Give Young Women Investors An Edge

Step 4: Make an initial deposit

Once the commodity trading account is opened, you have to deposit the initial margin, usually about 5%-10% of the contract value. In addition, you must also keep a maintenance margin to cover up losses if the market tanks.

Step 5: Create a trading plan

The last step before you start trading in commodities is to create a trading plan that will help you understand the market and also gauge your risk appetite and financial capability. The process is aimed at helping you develop strategies that fit your personal trading style and objectives.

Related: Investment In Commodity Funds: Know The Benefits, Risks And Top Performing Funds

Last words

Commodity trading platforms have gained popularity mainly because of the convenience they offer. Executing a trade is faster, as there is no need to contact a broker physically to place orders, and aids such as commodity trading charts and technical analysis programs are available through an online commodity trading account. But do note that it takes hard work and dedication to succeed as an independent trader. 



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