If you are a HNI or trader who enjoy day trading, commodity trading in India can be a good option for you. The commodity markets in India can be divided in three main areas :
1) Bullion – Gold and silver. This is one of the largest and prices are depended on international gold prices and the exchange rates. This is something which HNI or traders can trade into. Very liquid market and easy to trade in.
2) Agri- Commodity – This is basically trading in Agri commodities like Pulses, Rice and Soyabean. This is mostly traded by Farmers, agri-traders for hedging the risk. If you understand the agri markets, only then you should try to trade in these. Some agri-commidity are liquid but some of them can be illiquid and the markets rates can be inflated without much trading happening. If you are a novice trader, stay away from agri-trading.
3) Energy – This mostly consist of Oil and gas trading. Prices of these are also decided based on the international r0ates and exchange rate. This again is mostly traded by experts in technical analysis or someone who have a good understanding of geo-political situation of the world. Very liquid market to trade in.
The major exchanges which deals in Commodity trading are
- NCDEX – National Commodity and Derivative Exchange
- MCX – Multi Commodity Exchange of India
- NMCEX – National Multi Commodity Exchange of India
All of these provide electronic trading and settlement systems and have a national presence.
Which are the Major Brokers providing Commodity trading
Most of the trader now a day provides trading in Commodities. Some of the major once are ICICI Comm Trade, ShareKhan and HDFC. Apart from these main stream brokers, discount brokers have also started providing commodity trading and some of the major once are Zerodha, RKSV and SAS Online. They provide very competitive rates and same quality of service as the full service commodity brokers. Find about the best commodity brokers here.
What is the minimum investment needed?
Minimum investment would depend on the commodity you want to trade in. For Gold on MCX, initial margin of 4% is charged. In case of additional volatility, a special margin at such percentage(as deemed fit) will be imposed immediately on both the buy side and the sell -side in respect of all outstanding positions, which will remain in force for next two days. But it will depend on your brokers also as to how much margin he needs.
Do I have to give delivery or settle in cash?
This is something which makes it different than equity futures. You can either take delivery in commodity or can settle in cash which in case of equity, your position is squared off and there is no option for taking delivery. But obviously, if you plan to take delivery you should have a place to store the commodity and physically take the goods from the sellers. Most of the trades in Bullion and Energy don’t end up in delivery but a lot of physical delivery takes place in agri commodity.
What do I need to start trading in commodity futures?
As of now you will need only one bank account and PAN Card . You will need a separate commodity demat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.
What are the other requirements at broker level?
Even if you are trading with a broker in equity, you have to fill another form for trading in commodity. Most of the brokers provide trading in both, so you shouldn’t have any issues in opening the account.
What are the brokerage and transaction charges?
The brokerage charges range from 0.10-0.25 per cent of the contract value for most of the full service brokers. Most of the discount brokers provide brokerage rate of Rs 20 per trade which is much cheaper than full service brokers.
Who are the players in commodity derivatives?
The commodities market will have three broad categories of market participants apart from brokers and the exchange administration – hedgers, speculators and arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators.
Hedgers are essentially players with an underlying risk in a commodity – they may be either producers or consumers who want to transfer the price-risk onto the market.
Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite.
For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.
Do I have to pay sales tax on all trades? Is registration mandatory?
No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller’s responsibility to collect and pay sales tax.
The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number.