Over the past few years, the emergence of several investment tools has encouraged all types of people to invest in different stock instruments. And the easy availability of mutual funds not only makes it easier but effective too. Among various instruments available to choose from, one promising option is to invest in commodities. So, before we proceed, let’s find out what commodity and its trading mean?
What is a commodity?
A commodity refers to a cluster of assets or goods that are of high value in our lives. They include food, energy, or metals. A commodity is a substitute and transferrable by nature. It can be characterized as every type of movable good that can be bought and sold, excluding actionable claims and money.
Commodity trading in India kicked off way back in time, even before it did in many other nations. But, foreign attacks and ruling, natural disasters, and various government policies and their alterations were major reasons behind the decline of commodity trading. Today, even though there are different types of the stock market and share market traders, commodity trading has reinstated its importance.
Here, it is important to mention that commodity trading is altogether different from trading in stocks. If you carry a high level of patience, you can choose to go with commodity trading as not many trades take place in this sector in comparison to dynamically active stock markets.
It is also said that commodity trading is largely influenced by a cyclic nature which is important for you to understand. Otherwise, it is better to bank upon a highly universal commodity such as crude oil or natural gas that is easy to liquid and can be traded in all international commodity exchanges.
Though commodity trading has its own pros and cons, it also provides a fabulous opportunity for traders to accrue unmatched profits by buying and selling commodities even online. However, in order to become successful in this type of trade, you need to exhibit high levels of patience, hard work, experience, knowledge, and dedication.
How to start commodity trading?
In the field of commodity trading, knowledge rules the world. Before you move ahead, it is widely recommended to understand each & everything about commodities and the factors that influence their prices in the exchanges. Apart from this, traders also need to have a strong hand in doing fundamental and technical analysis so as to make sound investment decisions in the commodity sector.
Here are important steps to start commodity trading.
Understanding commodity trading exchanges
The initial step to being commodity trading is to possess tremendous knowledge about the leading commodity trading exchanges.
In India, commodity trading is usually done on the National Commodity and Derivative Exchange (NCDEX), the National Multi Commodity Exchange of India Ltd. (NMCE), and the Multi Commodity Exchange of India Ltd. (MCX).
In all these exchanges, commodities can be traded online.
Finalizing the stockbroker
As a stockbroker would serve as an intermediary between you and the commodity exchange, it is necessary to make a great decision by choosing an appropriate and skilled broking firm. The broker must be listed and regulated by the regulators. The selection of the stockbroker or broking firm is important because it is the stockbrokers that hold your account and perform your trades.
The brokers also play a role in keeping the traders well-informed on commodity trading and in making logical financial choices by providing timely and valuable recommendations. So, if the broker on his own is not a successful and knowledgeable person, you may end up losing a lot of money quickly.
Also, while finalizing a broker, the trader must look at the type of fee (or brokerage) being levied as the fee differs from company to company and there may be various types of fees like the commission, platform fee, clearing fee etc. Another factor to consider while choosing a broker is the kind of services they deliver on their platform. One proven way to check the platform is to use their free trial and verify if it has all the fundamentals like charts, market data, research and analysis available on their online trading platform.
You can also try their brokerage calculator to understand all the associated fees and taxes.
Some of the most reliable and efficient full-service broking firms for commodity trading in India are Angel Broking, IIFL Commodity Brokerage, etc. and even some leading discount brokers also allow commodity trading including Zerodha, Upstox, etc.
Open a commodity trading account
Once you finalize the stockbroker or stockbroking firm you want to work with, the next thing to do is to open a demat account. It can be done by filling up an application form with the broker and furnishing necessary information about you such as age, financial status, income etc.
The broker then studies the information and checks your risk-bearing capabilities, credit rating and trading experience of the investor the company accepts or rejects the account opening application. The analysis is of tremendous value for the broker because he needs to verify that the trader has the financial capability to pay off his debts in case the market goes against his expectations and he encounters a loss.
Once the application is sanctioned, the account is open and is ready to use.
Make the minimum investment
After the commodity trading account opening is done, the trader needs to make an initial deposit to begin commodity trading. The original margin is deposited which is usually 5 – 10% of the contract value. For example, if you’re trading gold, the initial margin that needs to be maintained is ₹3200 which remains equal to 10% of one trading unit (10 gm) of gold.
Prepare a trading plan
After doing all the basic things for commodity trading, the trader must come up with a trading plan to start commodity trading. The trading plan can be prepared by understanding the market, working on simulations, using his personal preferences, risk-taking capacity, and capital availability.
The trading plan that performs well for one commodity trader may not be suitable for another trader. The broking company helps the trader in obtaining the required information, familiarity, and practice and by giving them access to the fundamental and technical analysis tools and platforms. The trader must also design commodity trading strategies that are the best fit for his goals and trading pattern.
Therefore, to start commodity trading, it is strongly recommended to be well-ready and well-aware. The basic documentation and procedures need to be completed and then the trader needs to put him in the trading mode to enter this competitive trading domain so that he does the trading strongly and gainfully.
It is also equally important for the trader to start practicing risk management techniques and not trade excessively to make sure that he does not end up losing more than he can actually afford. Most significantly, being a performer in trading commodities asks for a lot of hard work and devotion that are key to success in this sector.