- Date : 28/01/2022
- Read: 3 mins
Lets understand what is MCX and the benefits of trading on MCX
As an investor, you have options other than equity shares to buy and sell. You can also trade in commodities such as agricultural products and non-agri items like diamonds and steel. Just as with stock markets, there are dedicated commodities exchanges for such trading. India has several, with MCX being the first and largest.
What is MCX?
Short for Multi Commodity Exchange, MCX is an online platform for trading in certain specific commodities such as bullion, precious metals like gold and silver, crude, various metals, and agro products, including palm oil. (Full list provided further below).
The Mumbai-based exchange, which operates under the regulatory framework of the Securities and Exchange Board of India (SEBI), started operations in November 2003. Two years later, it entered into a licence agreement with London Metal Exchange (LME) for the use of the latter’s official prices as the basis for the settlement of certain futures contracts.
In 2018, MCX launched the first-ever brass futures contract in the world.
How MCX works?
Being a platform for futures transactions, MCX also serves as a platform for hedging, enabling price discovery and risk management. Futures are derivatives or financial contracts, which derive their value from the performance of some underlying assets (such as a share or a commodity like gold).
So, in a futures transaction, the buyer and seller are required to execute a settlement at a predetermined price on a predetermined date in the future, regardless of the current market price at the expiration date.
The futures market is volatile and short-term in nature as commodity prices are vulnerable to external factors such as weather, government policy announcements, etc. However, if you play smart, you can make profits.
Let’s assume you buy 10 quintals of wheat for Rs 50,000 to be paid six months later. In the meantime, thanks to political disturbance, supplies fail and the price rises, which means when you sell, you can command a higher price. However, given the volatility involved, it is advisable that commodities are best restricted to only a small portion of your portfolio.
List of commodities traded on MCX
Commodities traded on MCX can be used for hedging purposes. Here’s a list:
- Gold guinea;
- Gold Mini;
- Gold Petal;
- Gold Global;
- Silver Mini;
- Silver Micro;
- Silver 1000;
- Crude oil;
- Crude oil Mini;
- Brent crude oil;
- Natural gas;
- Base metals;
- Aluminium Mini;
- Copper Mini
- Lead Mini;
- Nickel Mini;
- Zinc Mini;
- Agri commodities;
- Crude palm oil;
- Mentha oil.
Benefits of trading on MCX
The organised structure at MCX brings transparency to the trading process, enabling traders to make informed decisions. Moreover, because contracts can be executed over several months, MCX provides traders with liquidity and diversification options.
Outside trading, MCX has proved to be a boon for producers, especially farmers who are dependent on prices quoted by middlemen. But thanks to MCX terminals, they now know the market prices for their produce and can negotiate better with intermediaries.