Why is commodity trading in India so popular?

commodity trading

Commodity markets have existed for quite some time. However, the exchange-traded system was first allowed in 2003 by the authorities. Commodity markets, which are an important element of the economy, now play a number of important responsibilities. Here’s a brief rundown to help you have a better understanding of the topic:

Assists with portfolio diversification: The modern investor is astute and always on the lookout for appealing investment opportunities to diversify his portfolio. Traditional instruments like stocks, bonds, mutual funds, and gold, on the other hand, remain popular among many investors. Commodity trading offers all investors a unique chance to learn about a new asset class that includes agricultural goods, metals, livestock, and bullion.

Commodities such as precious metals, crude oil, natural gas, energy, and spices, among others, are traded in commodity markets. The Forward Markets Commission now permits futures trading in India for over 120 commodities. Commodity trading in India is a terrific way for investors to diversify their portfolios while also helping to combat inflation.

What are the different types of commodity exchanges in India?

The Forward Markets Commission has established 22 commodities exchanges in India. In India, the following commodities exchanges are prominent for trading:

  • India’s Multi Commodity Exchange (MCX)
  • Commodity Exchange of India (ICEX)
  • NMCE (National Multi Commodity Exchange of India) NMCE (National Commodity and Derivative Exchange) NMCE (National Commodity and Derivative Exchange) NMCE (National Commodity (NCDEX)

Distributes risk

The commodities market is critical in reducing the risk that investors are exposed to. Commodities, in reality, may be used as hedging tools since the risk is spread among a large number of participants. A jewellery producer, for example, can buy gold futures to lock in the price and hedge against gold price volatility.

Increases investment in the agricultural sector

Many food grains perish due to a lack of sufficient post-harvest infrastructure. This has a direct influence on prices, affecting farmers as well as end-users. Farmers, brokers, and intermediaries become more profitable as a result of a healthy commodities market, resulting in additional investments in the agricultural ecosystem. The funds can be used to improve warehouse and transportation facilities.

As a result, the price is predictable.

Certain commodities are particularly elastic, and producers must maintain consistency to defend their market share. Commodity futures can play an important role in improving price predictability. The manufacturer may experience substantial short-term price fluctuations if there is no commodities market.

In the agricultural industry, it leads to improved aggregation and financing.

Agricultural goods are effectively aggregated thanks to organised commodities markets. Farmers also profit from the market’s formal process for raising funding, which minimises their reliance on the unorganised sector. Agricultural goods are also sold in a more streamlined manner as a result of such markets.

Reduces speculative excess

There is a lot of speculative demand for commodities like gold. In reality, gold demand is frequently fueled by speculation, resulting in excessive imports and the use of foreign exchange resources. However, there are no advantages associated with such speculative demand. It will be simpler to absorb speculative demand and protect FX resources if there is a strong gold commodities market in existence.

Despite the fact that commodities markets are still in their infancy, their importance in India cannot be overstated. Commodity trading is critical for price discovery and hedging price risk in order to protect investors.

What is the difference between a commodity futures contract and a commodity futures contract?

A ‘commodity futures contract’ guarantees that a trader will purchase or sell a specific amount of their commodity at a predetermined rate and at a predetermined time. A trader is not compelled to pay the full price of a commodity when purchasing a futures contract. Alternatively, they can pay a cost margin, which is a set percentage of the original market price. Lower margins imply that a big futures contract for a precious commodity like gold may be purchased for a fraction of the initial cost.

What Is a Commodity Market and How Does It Work?

Assume you purchased a gold futures contract on the MCX for Rs. 72,000 per 100 grammes. On the MCX, gold has a 3.5 per cent margin. As a result, your gold will cost you Rs. 2,520. Assume that the price of gold rises to Rs. 73,000 per 100 gm the next day. The bank account you linked to the commodities market will be credited with Rs 1,000. Assume it reduces to Rs. 72,500 the next day. As a result, your bank account will be debited by Rs. 500.

Important Facts to Remember About Commodity Trading in India

Commodity prices are influenced by a variety of factors. Before you begin trading in commodities, you should prepare in advance by studying these elements and learning tactics you may use, just like you would when investing inequities.

– Commodity trading offers more leverage, but it also comes with greater risk, as market changes are regular.

– It is vital to keep an eye on the market on a regular basis. If you’re new to trading, seek the advice of a commodities market specialist who can teach you the ropes and keep an eye on market swings.

Conclusion

Want to try your hands on the stock market? Why not be a part of Finlearn Academy and learn the tricks and tips. The experts will help you understand the concept in a detailed manner so that you can grow your capital easily.

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About the Author: John Trick

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