How to Trade in Commodities
The main advantage of commodities trading is that it provides a lot of diversification in your portfolio. You could spread out your risk pattern over many stocks and commodities. Your portfolio must contain shares, bonds and commodities that make it truly versatile.
Commodities like gold, silver and oil are becoming attractive investment for retail investors. The noteworthy point under this is that the commodities that you have a share in need not be held in physical stock. You don’t have to provide space for your investment in such commodities as it does not involve any kind of physical exchange. This saves you from investing in warehouse cost and other storage expenses.
When we compare the pricing of the commodities they are less volatile than the shares or bonds. The investment in commodities can be made by understanding the demand and supply terms. The stock exchange is the platform that provides for healthy transaction of commodities between the buyers and the sellers. Trading in Commodities could be done out of the three options like:
- The National Commodity and Derivative Exchange
- The Multi Commodity Exchange of India Ltd
- The National Multi Commodity Exchange of India Ltd
There are electronic trading facilitates as well as the traditional settlement system available in all the three exchanges. You could easily get the assistance of the broker who is allowed to trade in the exchanges in order to trade in commodities. Most of the brokers who trade in stocks now also have membership with the NCDEX and MCX. Every broker will have their own terms and conditions with regard to the minimum investment and margins rate. The minimum investment will be Rs.5000 and the margins usually range from 5-10% of the total value of the commodity investment. Again the minimum investment will also depend on the type of commodity like for gold and silver it’s on the higher side.
Similar to the shares the trading in commodities requires you to open a bank account as well as a separate demat account in the National Securities Depository Ltd. You need a broker in order to transact the order on the trading floor. To open an account with the broker you may be required to submit your PAN, bank account details and other forms for getting an account in your name.
The charges involved in commodity trading are brokerage and transaction charges. Usually the brokerage will be somewhere between 0.10 to 0.25 per cent of the value of the contract. Transaction charges will be between Rs.6 to Rs.10 per contract or lakh as the case may be. The charges will vary according to the commodities and will never exceed the maximum limit. Similarly it will also be different in case of delivery transaction wherein the brokerage is around 0.25 to 1%.
Investment in commodities requires detailed research of the market indicators. Such information could be gathered from newspapers and websites wherein the latest updates and the market reaction could be understood easily. Commodity exchanges are self regulating system and not like the shares trading. Though the Forward Markets Commission regulates the exchanges the brokers need not register themselves under the commission.
The market participants are categorised into three like
- Hedgers
- Speculators
- Arbitrageurs
Brokers are the mediators between the hedgers and the speculators. Hedgers are basically the producers and the consumers who are actually bearing the price risk and will like to transfer them on to the market. Producer hedger will try to mitigate their risk due to declining prices of the commodities while the consumer hedgers will do just the opposite.
The commodities available for trading is plenty as the Government has made all the commodities free for trading. However there are some list of major commodities coming under the purview of the exchanges like
- NMCE-Agricultural commodities and metals
- NCDEX-agriculture, metals, energy commodities
- MCX-commodities for futures trading
Sales tax, margin and other extra charges are applicable only during the delivery of the commodities. Understanding the commodities trading will help in wiser investment decisions and reap long term benefits.