Purpose of this article:
- Understand basics of Commodity Trading in India and Commodity Market.
- Provide detail about popular online commodity brokers in India.
- Compare and discuss about commodity trading websites, their products and services.
About Commodity Trading
Commodities in very simple terms are defined as natural resources, chemicals and physical products one can touch, taste, smell, grow, mine, consume or deliver. Commodities are interchangeable with other products of the same type, and which an investor can buy or sell.
Commodities have value which is mainly subject to supply and demand.
Commodities are being traded for money or other commodities for many centuries in local and international markets. For as long as people have engaged in trade, they have needed a system to organize the delivery of goods and make commerce more efficient and predictable.
Exchanges to trade commodities were setup for this purpose. Till 1970's the commodity trading in these exchanges were very straight forward. It was a market place where people use to come to buy & sell commodity products.
In 1971's, a significant change happen in US commodity trading when modern 'Commodity Future Trading' was introduced. This has changed the way commodities were being traded for centuries.
A commodity futures contract represents an agreement to buy or sell a specific type and grade of commodity for delivery at a specific time in the future at an agreed upon place at a market-determined price. In reality, commodity futures rarely lead to the delivery of an actual product, because the contract positions are typically closed out before the delivery date.
In India National Multi Commodity Exchange of India Limited (NMCE) got acceptance from Government of India to start commodity future trading in year Nov 2002. In year 2003, another exchange, Multi Commodity Exchange of India (MCX) was established for Bullion & Energy sectors.
Commodity as an Investment Option
Commodity is an excellent investment option for many reasons. Some of them are described as below:
- Portfolio Diversification - Commodity adds another asset class to an investor's portfolio and thus reduces the risk on overall investment. Pricing in commodity futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. Also commodity has a global presence and hence, it's a good portfolio diversifier.
- Commodities are much easier to understand as far as fundamentals of demand and supply are concerned then stocks.
- The size of the commodities markets in India is also quite significant.
- Commodity trading requires less initial investment as all an investor need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract.
- Unlike equity, commodity prices cannot become zero. This reduces the risk in holding them as an investment.
- Indian commodity market operates for more than 12 hours a day covering timings of all major international commodity exchanges, thus giving traders ample time to earn profits.
- Commodities can be hold in Demat form. There is no need to hold commodities physically in warehouses.
Commodity Exchanges in India
Commodities are being traded in Commodity Exchanges. Commodity exchanges provides electronic platform for sellers and buyers to trade in multiple options available.
An individual cannot directly go to exchange and make the trade. Exchange authorizes brokers, who interact with customers (investors) on behalf of exchange and charges commission/brokerages for their services.
Note: Forward Markets Commissions (FMC ) regulates the commodity markets in India. It is equivalent to SEBI.
There are multiple exchanges available in India for commodity trading:
1. Multi Commodity Exchange of India Ltd (MCX)
MCX is India based electronic commodity futures exchange. MCX provides online trading facility along with clearing and settlement operations for commodity futures across India.
MCX is the largest commodity futures exchange in India and holds market share of around 80%. MCX allows trading in more than 50 commodities across sectors like bullion, metals, energy, weather, and agricultural products.
Few key facts about MCX (Added on 27 Sept 2011)
- MCX, among the first exchanges to open in India, accounts for more than 80 percent of the country's commodity futures market. It ranked the world's sixth largest commodity futures exchange by number of contracts traded.
- MCX recorded a turnover of 63,933 billion rupees ($1.3 billion) in 2009/10, a share of 82.34 percent of the total value of commodity futures in India.
- Top listed contracts: Gold, crude oil, silver, copper, natural gas, nickel, zinc are the top traded commodities.
- Most traded contracts: Gold, crude oil and silver.
2. National Commodity & Derivatives Exchange Ltd (NCDEX)
Incorporated in 2003, NCDEX is an India (Mumbai) based online multi commodity exchange. NCDEX offers trading in around 59 commodities across multiple segments including agricultural, metals and energy. While the volume is less with NCDEX, it provides options to trade in almost all the commodities as MCX.
Few key points about NCDEX (Added on 27 Sept 2011)
- Launched in 2003, NCDEX is the second biggest exchange and is promoted by leading financial institutions and state owned banks. Goldman Sachs holds a minority stake.
- NCDEX logged a turnover of 9,176 billion rupees ($185 billion) in 2009/10, accounting for about 12 percent of the total value of commodities futures in the country.
- Top listed contracts: Soyoil, pulses, soybean and rapeseed.
- Most traded contracts: Guar seed, soy oil and pulses.
3. National Multi-Commodity Exchange of India Ltd (NMCE)
Incorporated in 2002, Ahmadabad based NMCE was the first multi-commodity exchange of India. NMCE offers trading in Oils and Oil Seeds, Base Metals, Pulses, Precious Metals, Spices and other commodities.
Few key features about NMCE (Added on 27 Sept 2011)
- Based in Ahmedabad, NMCE was the first exchange in India to be promoted after the Indian government demutualised the platform for commodity futures. It started with futures in gold and silver.
- NMCE's turnover stood at 2,279 billion Indian rupees ($46 billion)in 2009/10.
- Top listed contracts: Farm commodities.
- Most traded contracts: Rapeseed, soy oil and pulses.
4. MCX Stock Exchange (MCX-SX)
Incorporated in 2008, MCX-SX is an electronic platform for trading in currency derivatives. MCX-SX offers currency futures contracts in US Dollar-Indian Rupee (USDINR), Euro-Indian Rupee (EURINR), Pound Sterling-Indian Rupee (GBPINR) and Japanese Yen-Indian Rupee (JPYINR).
5. Indian Commodity Exchange (ICEX)
Incorporated in 2009, ICEX is Gurgaon based commodity futures trading exchange.
Key facts about (Added on 27 Sept 2011)
- ICEX is now building up its warehouse facilities. Reliance Exchangenext Ltd. is its anchor investor with MMTC Ltd., Indiabulls Financial Services Ltd., Indian Potash Ltd., KRIBHCO and IDFC among other partners.
- It posted a turnover of 1364.25 billion rupees ($27.5 billion) in its first year of operation (2009/10).
- Top listed contracts: Gold, crude oil, copper cathode, silver.
- Most traded contracts: Gold, crude oil and copper cathode.
6. Ace Commodity Exchange (ACE)
Ace Commodity Exchange , earlier known as Ahmedabad Commodity Exchange Ltd, started futures operations in 2010, but has been in the commodity trading business more than 50 years.
Below are few key points about (Updated on 27 Sept 2011)
- The Kotak group is a majority stake holder.
- Top listed contracts: Farm commodities.
- Most traded contracts: Soybean, pulses and soy oil.
Note: The decision to choose which exchange you would like to trade (MCX Vs NCDEX) depends on many factors including:
- Volume of trades and liquidity - Many active commodity traders prefer MCX over other exchanges because the volume at MCX is large and thus provides more liquidity.
- There are few commodities which are specifically available in certain exchange.
- Trade charges differ from exchange to exchange and commodity to commodity.
Types of Commodity Trading
In modern commodity exchanges, few different types of trading are available to investors. Some of the popular commodity trading types available in exchanges across India is as below:
- Spot Trading: In spot trading, commodities are sold for cash and delivered immediately to the buyer. As name suggest all the transactions in this are on the spot. Spot trading is available in NMCE, NCDEX.
- Future (Derivatives) Trading: In future trading an investor doesn't buy / sell commodity or own it. He speculate on the future direction of the price would be going up in the future. Future trading is a bet on future price direction. Future trading is done in lots, a predefine unit of commodity. Only margin money is paid by investor to secure a trade. The margin varies by commodity and exchanges.
Online Commodity Trading Companies in India
Some of the popular commodity brokers in India Financial Market are:
Things to consider when choosing a commodity future broker
Commodity brokers are authorized members of commodity exchanges (i.e. MCX, NCDEX). They work as commission agents between sellers and buyers. There are many local as well as online brokers who facilitate individual investors to trade in commodity for small commission/fees.
Choosing a correct broker could be challenging task for many investors. This article provides list of few popular online commodity trading brokers in India.
Following are few critical things one should consider when choosing an online commodity broker:
- Recommendations from friends or family members
- Commission (Brokerages) and Fees
- Trading Platforms (Features and capabilities)
- Quality of information in Newsletters, Market Research and Reports
- 24x7 Customer Support
- Exchanges available for trading in
Things to do before opening an online commodity trading account:
- Look at all possible options available and shortlist few brokers. Consider suggestions from friends and family members.
- Contact the brokers and ask them for demo of their trading platform.
Documents to open Commodity Trading Account
Following documents are required to open an online commodity trading account for an individual. Please note that the required document list varies from broker to broker.
- Recent passport size photograph(s) - 3.5 * 3.5 centimeters
- PAN Card
- Address Proof (i.e. Ration card , Driving License/ Learning License, Passport, Voter ID, Electricity Bill (not more than 2 month old from bill generation date), Landline Bill MTNL/BSNL (not more than 2 month old from bill generation date)
- Bank Proof (Personalized Cheque)