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How to Start Trading In Commodities, MCX?

Are you planning to start trading in commodities? But don’t have basic or foundation knowledge about it. Here I am with an article to help you learn about basics of commodity trading with MCX Exchange that is Multi Commodity Exchange. This article is a guide towards how to start trading in MCX or investing in Commodities in India.

The trading in the commodity market like NCDEX or MCX can be started with even. 5,000/-. But, if you’re going to invest capital and time in the commodity market, then I recommend starting with the 40,000/-. It will be sufficient amount for a beginning trader to start or study trading. And please don’t initiate trading with the borrowed money because the trading in the commodity market is subject of the investment with risk & without guarantee of profit.

Let’s learn first what commodities are and how they work. Investing something without understanding them can be a huge risk and a bad idea to lose money that was hard earned.

The commodities market is one of the foundations of the global trade system. For the serious trader, knowledge in how to trade commodities is vital: great profits can be made if a trader has in-depth expertise in the issues driving commodity prices, and understands the mechanics of how to trade on it.

A commodity is a basic good or raw material in commerce that individuals or institutions buy and sell. Commodities are often the building blocks for more complex goods and services.

The trade in commodities takes place in either spot markets or futures markets. In spot markets, the commodity trade happens immediately, in exchange for cash or other commodities. In futures markets, buyers and sellers trade a commodity based on a standardised contract. You do not have to compulsorily make or accept deliveries of physical goods here. Trade in futures contracts happens electronically and the contracts can be settled in cash.

Commodities can generally be divided into four categories:

  • Agricultural: This category includes food crops (e.g., corn, cotton and soybeans), livestock (e.g., cattle, hogs and pork bellies) and industrial crops (e.g., lumber, rubber and wool). In India, NCDEX that is National Commodity and Derivative Exchange is the platform for the traders in Agri. MCX have those but the volume is much-much higher in that.
  • Energy: These include petroleum products such as crude oil and gasoline, natural gas, heating oil, coal, uranium (used to produce nuclear energy), ethanol (used as a gasoline additive) and electricity. In India, MCX is the major exchange for Energy with Crude Oil and Natural Gas trading.
  • Metals: Precious metals (e.g., gold, silver, platinum and palladium) and base metals (e.g., aluminium, nickel, steel, iron ore, tin and zinc). In India, MCX is the major exchange for Metals like Aluminium, Copper, Lead, Nickel, Zinc and brass of course, recently introduced for trading.
  • Environmental: This category includes products such as carbon emissions, renewable energy certificates and white certificates. As far now we are not having any of these available in India to trade but yes they can be traded in NSE that is National Stock Exchange where you can invest in mining stocks.

In a normal market, the prices of futures contracts increase with maturity. The contract with the nearest contract month is priced the lowest. Meanwhile, the contract with the most distant contract month is priced the highest.
We are dealing in Futures only in commodity market rather the spot market. A commodity futures contract is an agreement to buy or sell a specific amount of a commodity at a fixed date in the future at a predetermined price. This contract specifies further details, like the quality of the commodity and the delivery location.

An investor could take a long position (where he buys a contract) or a short position (where he sells it). If the investor expects the price of a commodity to rise, he takes a long position. If he expects the price to fall, he opts for the short position.

These contracts allow buyers of commodities to avoid the risks associated with price fluctuations of products or raw materials. For example, a manufacturer of steel instruments may buy a contract for protection against rising steel prices. The sellers of commodities enter into contracts to lock in a price for their products. For example, an oil company may take a contract to guard against a fall in oil prices in future.

Other players—like funds, arbitrageurs, and retail investors—use futures contracts to gain from price movements.

The prices of commodities change on a weekly or even daily basis. When the price of a commodity rises, the buyer of the futures contract makes money. The buyer gets the product at the lower, agreed-upon price. He can now sell it at the higher current market price. If the price falls, the seller of the futures contract makes money. The seller buys the commodity at the current lower market price. He then sells it to the futures buyer at the higher, agreed-upon price.
In India, trade in commodity futures takes place on exchanges. Some well-known exchanges are the National Commodity and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange of India (MCX).

When an investor buys commodity futures, he does not have to pay the full price of the contract. The investor simply has to deposit a percentage of the contract as margin with the broker. The commodities trading exchange determines the margin amount. It is typically 5–10% of the contract value.

Features of commodity futures

  • Organised: Commodity futures contracts always trade on an organised exchange. NCDEX and MCX are examples of exchanges in India. NYMEX, LME, and COMEX are some international exchanges.
  • Standardised: Commodity futures contracts are highly standardised. This means the quality, quantity, and delivery date of commodities is predetermined by the exchange on which they are traded.
  • Eliminate counter-party risk: Commodity futures exchanges use clearinghouses to guarantee fulfilment of the terms of the futures contract. This eliminates the risk of default by the other party.
  • Facilitate margin trading: Commodity futures traders do not have to pay the entire value of a contract. They need to deposit a margin that is 5–10% of the contract value. This allows the investor to take larger positions while investing less capital.
  • Fair practices: Government agencies regulate futures markets closely. For example, there is the Forward Markets Commission (FMC) in India and the Commodity Futures Trading Commission (CFTC) in the Unites States. The regulation ensures fair practices in these markets.
  • Physical delivery: The actual delivery of the commodity can take place on expiry of the contract. For physical delivery, the member needs to provide the exchange with prior delivery information. He also needs to complete all delivery-related formalities as specified by the exchange.

The clearing house (i.e. the exchange) determines a ‘settlement price’ for each commodity at the end of a trading day. The settlement price is usually the last price at which the commodity trades during the day.

The clearing house compares the settlement price of your commodity with the price at which you had placed the order. If the price has moved favourably (i.e. increased in case of a long position and decreased in case of a short position), the difference is credited to your account.

If the price has moved adversely (i.e. decreased in case of a long position and increased in case of a short position), the difference is debited from your account.

This process repeats at the end of each trading day. From the third day onwards, the comparison is between the settlement price of that day and that of the previous day.

The commodities being traded in MCX as on date with Market Lots size (A lot is the standard number of units in a trading security. In the financial markets, a lot represents the standardized quantity of a financial instrument as set out by an exchange or similar regulatory body).  
Mostly traders do not select a broker; Broker selects them via referrals from their relative and friends or through brokers/agents. So, open an online Demat or trading account with low brokerage and must focus on the below things while selecting a good broker

If you don’t know what Demat Account is, it’s an account that holds all the shares that you purchase in electronic or dematerialized form. Basically, a demat account is to your shares what a bank account is to your money. Like the bank account, a demat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange traded funds (ETFs).

Now with that definition, let me elaborate you need a demat account only if you are willing to deal in Shares that too taking the delivery or holding the shares for T+1 day. If you want to invest in other than stock market you need a demat. BUT if you are planning only intraday or day trading; you don’t need a demat account. YOU NEED ONLY TRADING ACCOUNT.

How to open a demat account?

Choose a broker on parameters: brokerage charges, annual charges and leverage provided. Fill up a form; submit documents like PAN CARD, CANCEL CHEQUE, ID PROOF, and INCOME PROOF (BANK STATEMENT OR ITR) AND INVESTMENT OR MARGIN CHEQUE.


Margin is your investment amount that you are investing and leverage is the limit you get on it. Let’s say you have 10,000/- to invest that is your margin and leverage is limit that broker provides for trading. Like if he gives you 4 times limit that means you can make a trade where you will need a margin of 40,000/-

Why? Because broker make commission on turnover more turnover you make in buy and sell more profit he makes. Now once your demat is open now you get a trading terminal. What is trading terminal? Well its software that enables you to go online access the Exchange and make a trade in it. You can buy and sell via that terminal. If you are not comfortable online trading, ask your broker to provide you offline trading number. One that numbers you can share your credentials and ask the person to put the trade on your behalf.

Get a discount broking account with 20/- Brokerage Flat per executed intraday trade (NOT LOTS/SHARES) and 0/- brokerage on delivery trades and upto 22 times leverage or limit on margin with Zerodha Broking. SIGN UP FOR ZERODHA

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