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.

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.

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.