Commodity Trading offers investors various benefits including portfolio diversification and providing a hedge against inflation and geopolitical events. However, in order to gain the maximum out of this investment opportunity, it is important to get the basics correct and make investment decisions that take into account your financial goals and risk appetite.
In keeping with this, one of the most common queries that you might have with regards to Commodity Trading is – What is the difference between MCX & NCDEX?
Before we explain this, let us start by understanding the basics of Commodity Trading.
What is Commodity Trading?
A Commodity refers to a basic raw material or primary agricultural product that can be bought and sold in bulk. Commodity trading involves the trading of commodities and their derivatives products. Trading in commodities offers investors a simple way to diversify their portfolios beyond traditional investments. However, investors need to be aware and informed about the risks involved in Commodity Trading since it is a highly speculative channel.
The most commonly traded commodities include metals, energy goods, agricultural goods, and environmental goods.
Commodity Trading is regulated by separate exchanges. Some of the major Commodity Exchanges in India include:
- Multi Commodity Exchange of India (MCX)
- National Multi Commodity Exchange of India (NMCE)
- Indian Commodity Exchange (ICEX)
- National Commodity and Derivatives Exchange (NCDEX)
Let us focus on the two most commonly used exchanges – MCX & NCDEX
Multi Commodity Exchange of India (MCX)
Multi Commodity Exchange of India Ltd. (MCX), started operations in November 2003 and is regulated by the Securities and Exchange Board of India (SEBI). MCX is India’s first listed exchange. It offers commodity options contracts, bullion index futures, and base metals index futures contracts.
National Commodity & Derivatives Exchange Ltd. (NCDEX)
National Commodity & Derivatives Exchange Limited (NCDEX) is a multi-commodity exchange that focuses on revolutionizing India’s agricultural sector. It offers a diverse range of products such as commodity futures, options in goods, and index futures. Due to this, NCDEX plays an important role in providing opportunities that cater to the needs of various sets of participants in the agriculture value chain. NCDEX commenced operations in December 2003.
Comparison between MCX and NCDEX
| Features | Multi Commodity Exchange of India Ltd | National Commodity & Derivatives Exchange Ltd |
| Established in | November 2003 | April 2003 |
| Key Highlights | MCX has many firsts to its credit, some of them are as below:
It is India’s first exchange to launch options contract in commodities. It is also the first exchange to be listed, It is the first to introduce evening trading to match international market hours to provide real-time hedging solutions It is the first clearing corporation in the commodity derivatives market It is the first exchange to launch futures on bullion and metal indices |
NCDEX is India’s largest agricultural derivatives exchange with a market share of 75% in agricultural derivative contracts for the Financial Year ending March 2021. |
| Focus | MCX includes industrial metals, precious metals, and oil futures. | NCDEX has clear leadership in the agriculture trading segment. |
| Types of commodities traded | Metal – Aluminium, Copper, Lead, Nickel, Zinc
Bullion – Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Petal (New Delhi), Gold Global, Silver, Silver Mini, Silver Micro, Silver 1000. Agro Commodities – Cardamom, Cotton, Crude Palm Oil, Kapas, Mentha Oil, Castor seed, RBD Palmolien, Black Pepper. Energy – Crude Oil, Natural Gas. |
Cereals and pulses: Maize Kharif/south, Maize rabi, Barley, Wheat, Chana, Moong, Paddy (basmati)
Soft: Sugar Fibres: Kappa’s, Cotton, Guar seed, Guar gum Spices: Pepper, Jeera, Turmeric, Coriander Oil and Oil seeds: Castor seed, Soybean, Mustard seed, Cottonseed oil cake, Refined soy oil, Crude palm oil |
| Commodities Traded | 40 products such as precious metals, gold, silver, and bullions, etc. | 34 agro-based products such as cereals, oils, oilseeds, etc. |
| Number of Clearing Banks | 16 | 15 |
Common factors between MCX and NCDEX
Since both these exchanges are related to commodity trading, there are also many similarities between them, such as:
- Both are regulated by SEBI.
- Both are headquartered in Mumbai.
- Both operate from Monday to Friday and offer online trading platforms for investors.
- Both deal in conventional contracts which ensures that the commodity quality, lot size and expiration dates are all standardised.
Some related terms
As you get more interested in Commodity Trading, and MCX and NCDEX, you will also come across some terms such as below:
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Mandi:
A regulated physical market
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Order entry:
This refers to the entering of orders given by customers into the computer terminals located at the premises of the Trading Members.
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Contract Expiry Month:
This is the specific month in which delivery may take place under the terms of a futures contract.
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Mark to Market Settlement:
All the open positions are marked to market every day, based on the Daily Settlement Price for each contract.
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Physical Delivery:
This refers to the transfer of physical commodity from the client holding short position in a futures contract to the buyer of a futures contract, as per the detailed procedure laid down by the commodity exchange.
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Base price:
On the introduction of new contracts, the base price would be the previous day’s closing price of the underlying commodity in the prevailing spot markets. On all subsequent trading days, it would be the daily settlement price of the futures contract on the previous trading day.
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Trading Cycle:
The period, as notified by the Exchange from time to time, during which the Derivatives Contract will be available for trading.
Conclusion
Commodity exchanges are integral to the growth of the commodities market. They provide an organized platform for trading, mitigate market volatility, and offer a new asset class for investors looking to diversify their portfolios. At a time when commodity trading is showing encouraging growth, it is important to stay updated about the details of the two most prominent commodity exchanges in the country. NCDEX and MCX trade in distinct commodities, and present their own benefits and feature.
