The formalized online commodities trading market opened in India in 2003 and now retail investors can also participate. All they have to do is open a separate commodity demat and trading account with a registered stockbroker.
Foreign Portfolio Investors (FPIs), with the exception of Authorized Foreign Enterprises (EFEs), are prohibited from trading in certain sensitive agricultural commodities and other commodity products. However, in order to promote liquidity in the Indian commodity market and improve its status, the Securities and Exchange Board of India (Sebi) has proposed changing this rule.
Now let us understand what a commodity is and how to trade commodities in India.
What is a commodity?
A commodity is a physical good or product that has some utility and value in people’s lives. Examples would be – crude oil, mentha oil, cotton, soybeans, steel, aluminum, gold, lead and the like.
A commodity is a commodity or primary agricultural product that can be bought or sold, such as wheat, gold, or crude oil, among others. Commodity trading is the buying and selling of commodities and their derivatives,” said Narinder Wadhwa, National President of the Commodity Participants Association of India (CPAI).
A commodity is a product that serves a specific purpose.
What are the options for trading commodities in India?
There are three popular ways to trade commodities in India and you can also invest indirectly through mutual funds. Commodity traders and companies that deal in commodities buy and sell commodity futures contracts on exchanges as a result of speculative trades or business needs, as the case may be.
Read here to learn more about the risks involved in commodity trading
A commodity exchange is a regulated market where trading in commodities takes place. Trading takes place in derivatives: futures and options. A futures contract is an agreement to buy or sell a fixed amount of a commodity at a predetermined price and within a specified expiration date,” adds Wadhwa.
Here are the three most popular ways to trade commodities:
Raw material mandis: Agricultural and other commodities are traded primarily this way. This is also known as a “spot market”, where buyers and sellers decide on the spot what price they are willing to pay for a product. In India, the respective states regulate this market and also regulate the respective rules.
Commodities are often divided into two broad categories: hard and soft commodities. Hard commodities include natural resources that need to be mined or extracted, such as gold, rubber, and oil, while soft commodities are agricultural products or livestock, such as corn, wheat, coffee, sugar, soybeans, among others. A commodity market is a marketplace for buying, selling and trading such commodities or primary products,” says Megh Mody, research analyst at Prabhudas Lilladher, a financial services firm.
Futures and options market: This market is regulated and managed by Sebi. What is happening here is that commodity futures and options based on those futures (not spot market prices) are offered for trading by investors. For example, Crude March Fut is the name of the crude oil futures contract that expires on March 19th. So investors who buy this contract must either sell it at a loss or a profit well before March 19, or take delivery of 100 barrels of crude oil per lot. Almost all commodity traders choose the first option, as it is also the most practical.
Prices in the commodity futures markets are based on physical spot prices as well as international reference prices from global exchanges such as NYMEX, COMEX and CBOT and show a strong correlation with the conversion of the USD-INR currency pair. This is because the underlying price is quoted in dollars on these global exchanges. Direct global exchange connections do not yet exist in the Indian equity markets,” says NS Ramaswamy, Head of Commodities, Ventura Securities Ltd.
There are various mutual funds available that investors can use to gain exposure to various commodities. Some of these could include gold funds, water funds, and world resource funds, among others. Since 2019, Sebi has allowed investment funds to invest in all exchange-traded commodity derivative products, with the exception of a few “sensitive commodity contracts”. But they need to weigh their position before the contract expires.
Physical spot prices are used to set prices in the futures markets for commodities.
How does commodity trading work on the stock exchanges?
When trading commodities on exchanges, there is no cash market, all trades are settled via futures contracts. There are two choices an investor has when deciding to trade commodities on the stock exchange.
He can either take delivery of the commodity physically or convert the commodity futures contract to demat mode and settle in cash at a profit or loss depending on the price of the commodity.
Delivery of a goods contract process
Most commodities traders choose to settle the contracts in cash rather than receiving the commodity. For example, MCX operates a pan-India logistics warehouse; The full list of these can be checked here
Physical delivery of the crude oil futures contract will take place at Jawaharlal Nehru Port in Mumbai. Let’s say you bought a crude oil futures contract lot and then didn’t close it out before the contract expiry date. So, now you have to receive this crude oil contract. A single lot of crude oil contracts is 100 barrels. So you can either go to the JNPT port in Mumbai and show there the contract purchase receipt or the warehouse/vault receipt showing that the said goods have been purchased by you and are being held at that warehouse. You will also receive an offer notice, delivery intent or delivery order from the seller of this contract with all required delivery details. If you default on a commodity purchase despite buying the contract, the exchange will levy a heavy penalty on you, and you could also face legal action. The penalties are different for different goods.
Read more about this in detail here
“If one prefers to convert a commodity futures position into a delivery, the methodology is different. Unlike the stock market, where delivery takes the form of a dematerialized electronic mode, delivery in commodity markets is physical (tangible). ).
How are commodity margins calculated?
Let’s say you want to trade crude oil futures. Many crude oil futures contracts are made up of 100 barrels. So for intraday trading (9:00 a.m. to 11:55 p.m.) you need 50% of SPAN. SPAN is the standard portfolio analysis of risk. It is calculated by the exchanges based on the price and vitality of the particular stock or commodity on that particular day and updated during the trading session of the particular stock or commodity.
If you want to hold this in your demat account to continue trading, you need 100 percent of the SPAN money, meaning you have no leverage.
You can read in detail how exchanges calculate SPAN.
In relation to the further reduction of the intraday leverage to a maximum of 5x for shares and the minimum SPAN+Exposure for F&O from September 1st 2021, ANMI (NSE Member Association) prepared a presentation asking to do so to reconsider.
This is where the arguments are made
1/8
— Nithin Kamath (@Nithin0dha) May 25, 2021
At 2.03pm on Mar 26, an April Crude Oil futures lot would require Rs 2,34,176.25 in cash as SPAN and risk-adjusted margin to hold it overnight (delivery date), while one lot would cost Rs 8,621. Whether or not your broker collects the entire SPAN and Risk Margin is entirely at their discretion.
For example, some brokers charge full 100% SPAN + Exposure margin up front, even for intraday trades. Read the guidelines of your respective broker regarding this.
If your total cash balance is below SPAN margin requirements while trading, you will receive margin calls from your broker. If you receive such notifications, you can either close the trade at a loss or deposit additional funds into your trading account and continue holding the trade in question.
Read here to learn more about margin requirements when trading derivative products such as futures and options
Where does online commodity trading take place?
There are four national commodity exchanges in India, all of which are regulated by Sebi. These are in particular the Multi Commodity Exchange of India Ltd (MCX), the National Commodity and Derivative Exchange (NCDEX), the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Online trading markets for commodities in India are open Monday to Friday from 9:00am to 11:55pm (November to March) and from 9:00am to 11:30pm (March to November).
The market times were deliberately kept in such a way that the price of the respective raw material could be determined synchronously with the US and European prices. These times are also synchronized with the US Daylight Saving Time system, hence the additional 25 minutes trading time from November to March.
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