India’s economy is growing at a fast pace. With 6-7% GDP growth year on year, the booming economy allows people to participate in this growth and make money off the growth of the industry. This is why there are so many investors in the Indian markets looking for attractive investment options. While some choose to park their money in a savings account, fixed deposits and provident funds, others venture to the capital markets and invest directly in companies contributing to the nation’s growth.
In the capital markets, most investors invest in equity or debt through stocks, bonds and mutual funds. However, there is another investment avenue for those looking for portfolio diversification and that’s the commodities market. Commodities trade in India is not as popular as equity trading mostly because of the lack of awareness but it offers equally attractive options to invest money and generate long term wealth as well as short-term gains.
Types of commodities
To get started in commodities trade in India, one needs to first understand the kind of commodities available and investment avenues. The knowledge of the market makes it possible to make knowledgeable investment decisions that don’t lead you astray in your investment journey.
Commodities can be grouped into five major sectors including agriculture, precious metals, energy, services and metals and minerals. These sectors include commodities such as:
Agriculture: Spices, grain, pulses, oil and oilseeds
Metals and minerals: Iron ore, steel, aluminium, zinc, tin
Precious metals: platinum, palladium, silver and gold
Energy: Natural gas, Brent crude, crude oil, thermal coal
Services: Energy services, mining services etc
Now, each of these commodities is traded across many exchanges just like stocks. However, these exchanges are different and include National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India (MCX), Universal Commodity Exchange and National Multi Commodity Exchange of India.
How to start commodity trading
There are a total of 22 commodity exchanges in India which are controlled by the Forward Markets Commission.
To start trading in commodities, one needs to have a bank account from which transactions will be made as all trading is now online. Secondly, one needs to have a separate commodity Demat account with the National Securities Depository Limited to be able to trade on exchanges such as NCDEX.
The Demat account is just like a bank account which keeps a track of all your transactions and stores your holdings of commodities as well as their futures and options.
The way to trade in commodities is through futures. A future is nothing but a contract where two participants agree to make a delivery/payment on agreed-upon terms on a date in the future. This contract allows you to speculate on the price of the commodity and make gains if it goes in the direction of the agreed-upon price as mentioned in the future.
For instance, gold could be trading at Rs 80,000 per 10 gram in the spot market i.e. that’s the gold’s price today. Now, you can buy a gold future priced at Rs 81,000 for a date after 30 days in the commodities market. If the price of gold in the spot market moves to Rs 82,500 after a week of investment, you will be able to get Rs 1500 (82,500-80,000) in your account as your gain for every 10gm of gold futures you bought.
Similarly, if the price falls below Rs 80,000 to say, Rs 79,500. Then, Rs 500 (80,000-79,500) will be deducted from your bank account.
Types of commodity futures settlement
Note that you will need to trade through a broker to be able to execute these transactions. There are several brokers in the industry and some big names also offer the option for you to directly trade online through their interface.
The transactions are all made electronically and no settlement happens in cash. However, one must note that commodity trade can be of two types:
- – Delivery based
- – Cash settlement based
Under delivery based, if you are buying or selling futures of a certain commodity, you will have to actually supply/receive the units of the commodity once the contract expires. In cash-settled mode, you can simply choose to settle the gains/losses in cash without taking the delivery.
Trading in commodities is not that complicated but one must remember to consult a good broker before jumping into the market. At the same time, it is important to know the kind of commodities, contracts and other criteria before putting your money in the market. A good strategy along with deep knowledge of the market will go a long way in making your investment worthwhile.