Commodity Market Trading: Meaning and How To Trade

We’ve explored the basics of the stock market in the previous modules. You’ve probably understood quite a bit about stocks as an asset. In this module, we are going to explore another important trading instrument - commodities.

A commodity is a raw material or a basic resource that is utilised to produce consumer items. Simply put, commodities are inputs in the production process. Primary agricultural products, such as rice, wheat and pulses, precious and semi-precious metals, such as gold, silver and copper, and energy-related trades of value, such as crude oil and natural gas, are some common examples of commodities. 

Now, in commerce, commodities can be interchanged with other goods that are of a similar type (even if there is a slight difference in quality). Remember, back in school, you would trade one of your stationery for another’s because you found theirs to be more fancy, i.e. in other words, you found value in it? It is a similar concept here, only that the value is slightly more long-term and financial. 

Let us dive deeper into commodity trading, markets, advantages and disadvantages, and everything you need to know about commodities.  

Commodity Trading – A Basic Idea

As of 2022, the Central Government had permitted trading in 91 goods and around 41 commodities were reported to be in active trade. Commodity trading essentially refers to the act of purchasing and selling goods that are produced by people or nature for profit. Now, when you traded stationary with your friend, you might have either offered your goods upfront or you might have promised something in return in the future. Commodity trading also works on the same concept. Based on how a commodity is being traded, there can be 3 different types of sub-markets. Let’s explore them briefly.

• Spot market 

A spot market is where buyers and sellers connect and negotiate, and the commodity is immediately delivered in exchange for cash or payment against documents. It can also happen that the title of ownership gets transferred from one party to another once the commodity is delivered. Basically, there is no speculation involved in spot transactions.  

• Forward (futures) market

Both futures and forward contracts involve two parties who agree to buy and sell a certain commodity on a specific date at a predetermined price. However, there are subtle differences:

• A forward contract is negotiated privately and arranged over the counter. Hence, there is a risk of default associated with such contracts because of the lack of regulation. 
• Futures contracts are standardised and can be traded on the stock exchanges. They have uniform terms, set dates of maturity, and guaranteed payment on the agreed-upon date.

• Options market 

While options are quite like futures contracts, the buyer (option holder) has the right but no obligation to purchase or sell an underlying instrument or asset at a previously specified price on a particular date. 

Now, like equity has the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) to facilitate the actual trade, commodities, too, require exchanges to serve as the platform for trade. Let’s quickly run through some of the popular commodity exchanges in India.

How To Trade in Commodity FnO With Angel One?

To trade in Commodity FnO with Angel One, follow these steps:

1. Open a Demat and Trading Account: Register with Angel One to get access to commodities trading on exchanges like MCX.
2. Initial Deposit: To start trading, fund your account with an initial deposit, usually a percentage of the contract value.
3. Margin Requirements: Understand the margin requirements for different commodities to manage your trades effectively.
4. Research and Analysis: Utilise Angel One's research reports and tools for informed trading decisions in the commodity markets.
5. Start Trading: Use the Angel One trading platform to place your trades in the commodity F&O market, keeping track of your positions and market movements.

India’s Main Commodity Exchanges  

While the Multi Commodity Exchange (MCX) and the National Commodities and Derivatives Exchange (NCDEX) are the key commodity exchanges in the country, there are other local exchanges as well as exchanges that offer particular types of commodity trading opportunities. Let’s find out a bit about them here: 

• Multi Commodity Exchange of India (MCX) 

Founded in 2003, MCX specialises in a wide array of commodities, including energy (natural gas, crude oil), metals (silver, gold, copper), and agricultural items (cotton, soybean, chana, etc.). You can trade in both futures and options contracts on its robust platform that has efficient mechanisms for risk management in place. It is possible to access MCX via trading terminals or brokers.   

• National Commodities & Derivatives Exchange (NCDEX) 

Established in the same year as MCX, NCDEX is dedicated to agricultural commodities, such as pulses, cereals, oilseeds, and spices. Farmers and other agricultural stakeholders can use this platform to protect their future incomes and hedge against volatility in prices. NCDEX has a settlement system based on delivery, which means buyers receive actual commodities once the contract matures.  

• National Multi-Commodity Exchange of India (NMCE)

Focused on both non-agricultural and agricultural commodities, NMCE was established in 2002. Market participants can avail of electronic trading facilities and futures contracts through this platform. NMCE plays a key role in improving income stability for traders, farmers, and other stakeholders by helping them manage price risks efficiently.  

• Indian Commodity Exchange (ICEX)

Established in 2009, ICEX is relatively new in the commodity market in India. It offers an exclusive platform for trading diamond derivatives and hedging against their price fluctuations. It allows you to sell and purchase standardised diamond contracts and ensures transparency in the trading of these precious stones. 

Commodity Trading Hours

Knowing when commodity markets open and close is essential for tracking trends, devising strategies, and ensuring a profitable trading experience. Trading hours for commodity markets usually depend on the type of commodity being traded, unlike the fixed timings of the equity market functioning. 

There are three sessions in a commodity market:

• Asian 
• European
• American 

Each session comes with unique trading hours and features. Also, commodities like crude oil and gold, which are in high demand, usually have long trading hours. At a major commodity exchange like MCX, the trading hours (in IST) are as shown below. However, it is best to check the official website for the latest timings as they might get updated. Also note that commodity exchanges are usually closed on holidays like Independence Day, New Year’s Day, Christmas Day, and so on.  

Here are some of the timings of commodity trading:

Commodity	Trading Session	Morning Session	Evening Session
Gold	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM
Silver	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM
Crude Oil	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM
Natural Gas	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM
Copper	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM
Zinc	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM
Lead	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM
Nickel	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM
Aluminium	Monday-Saturday	10:00 AM - 11:30 AM	5:00 PM - 11:30 PM

 

Here are some factors that impact the timings of commodity markets: 

• Global demand and supply – For example, a rise in crude oil demand due to a geopolitical occurrence might lead to longer trading hours.
• Market regulations – Regulators set the schedules and trading hours for different commodities to ensure fair conduct, transparency, and equal market access for all traders.
• Differences in time zones – Since different regions and countries have varying working hours; it might impact commodity trading hours.
• Political and economic events – Natural disasters or changes in government policies in a key commodity-producing region can increase volatility and extend hours of trading.
• Seasonal demand – For certain commodities, like agricultural products, demand might be seasonal (during planting and harvesting). This can cause changes in trading hours. 

So, what is the best time to trade commodities? Keep in mind the following: 

• Opening hours – Entering or exiting a trade is easy during the first few hours after the market opens, as liquidity and trading volumes are both high.
• Overlapping hours – You can also trade commodities when there is an overlap between the hours of two or more markets. For instance, trading activity in crude oil and gold often shoots up when European and Asian markets overlap.
• Economic data release hours – Economic data releases, such as GDP numbers or non-farm payroll reports, affect commodity prices. It can help you make the most of sudden movements in prices.
• Seasonal factors – Agricultural cycles and weather patterns impact the demand for some commodities. For instance, during winter, the demand for energy-related commodities such as natural gas might go up, presenting you with a good opportunity to trade. 
• Volatile periods – Price fluctuations caused by market volatility can help you make quick and even substantial profits.

Tax on Commodity Trading 

Commodity trading, too is subject to capital gains taxes, much like equity. If you remember, the duration in the market dictated the tax on equity (Look it up here if you need a refresher!)  Similarly, the taxation on commodities too depends on the type of contract selected by a trader - whether it qualifies as speculative trade or as non-speculative trade. 

Both types of trading in commodities are considered to generate business income (not personal income, therefore warranting you to use a different form to file your income tax) and are taxed according to the taxpayer’s income tax slab. However, this is if you make a profit. 

In case of a loss, the tax is calculated differently. Here is what happens:

• You are allowed to offset your losses against profits from the same category as per the Indian income tax laws. This means you can offset speculative trading losses with profits made from speculative trade but not profits from non-speculative trade.  
• If you incur losses in speculative trading, you can carry them forward for 4 years (calculated from the financial year during which the loss happened). This means you can carry the speculative loss forward and offset it with the speculative gains you make in the subsequent years. Taxes will be levied only on non-speculative gains.
• However, losses incurred through non-speculative trading can be offset with speculative gains. You can carry non-speculative losses forward for a maximum of 8 years and offset them with non-speculative or speculative gains. 

So, what really sets commodity trading apart from equity trading? Let’s take a look at how commodity trading fares against the two other popular forms of trading - equity and forex. 

Commodity vs Equity Trading 

The following table gives a sneak peek into the differences between commodity trading and equity trading:

Parameters	Commodity Trading	Stock Trading
Ownership	No company is involved, and no actual commodity is purchased. Traders invest in futures contracts reflecting the commodity’s value.	Investors buying securities gain a percentage ownership of the company that is listed on the stock exchange and its assets.
Trade duration	Commodity futures and options expire before which investors must sell or buy the underlying commodity.	Equities don’t expire. You don’t have to buy or sell shares and can hold stocks even for a lifetime.
Purpose	Commodity producers hedge against unfavourable price fluctuations via futures contracts.	The chief objective is to reap profits from high-potential companies and build wealth.
Margins	It is well-known for its high leverage and very low margins. To gain exposure to higher trades, you must deposit a part of the total trade as the initial margin.	Investors must pay the full value of the trade.
Volatility	Commodities are extremely volatile, and demand-supply dynamics can be impacted by disasters, wars, riots, etc.	The equity market is relatively less volatile, and stock prices fluctuate depending on market sentiments, economic status, company fundamentals, etc. Temporary economic shifts are factored in the share prices.
Trading hours	Longer hours – for instance, 9:30 AM to 6:30 PM	9:15 AM to 3:30 PM (fixed hours)

Commodity vs Forex Trading

Now, let’s take a look at how commodity trading is different from forex trading: 

Parameters	Commodity Trading	Forex Trading
Basic idea	Traders determine the price movement of a commodity based on social, political, and economic factors.	It involves analysing how a particular national currency moves against another major currency.
Impact of global events	It is heavily affected by wars, strikes, discoveries, weather conditions, etc.	Not as affected by such events.
Required capital	Adequate capital is required to trade commodities.	A few dollars might suffice to begin.
Risk	Commodity trading can involve high risk.	Forex trading involves relatively lower risk.
Regulation	Closely regulated by governing financial bodies.	Traded over the counter, via banks or brokers, and less regulated.
Leverage	Not easy to get, though available.	Widely available and often offered without any checks done on the trader's financial history.

Art of Trading Commodities Successfully

Commodity trading contains as much risk as equity trading. You may want to be careful about matching your personal risk profile with the risks involved in your choice of trading instruments. Here are some the factors to consider if you are looking to begin trading in commodities: 

• Pick the Right Broker

Full-service brokers as well as discount brokers, might offer paid or free commodity recommendations, low brokerage, free trades, and free account opening. However, before making a choice, research well, compare multiple brokers based on services and costs, and read their reviews. This is important because reaping profits through commodity trading may be influenced by the broker you choose. For instance, your profits will be low if the brokerage is too high. Or if the broker’s platform is slow, it might take time for your trade order to get executed. So, pick wisely. 

• Update Your Income Status  

Your broker will want to be sure of your income status to minimise associated risks, as commodity trading depends on leverage. 

Wondering what leverage in this context is? Leveraging helps traders to buy and trade in commodities that are more expensive than what they can afford. You can also think of leverage as the margin that needs to be paid for placing a trade order. While in the case of index futures, the margin is generally 10%, in the case of commodity trading, leverage can go up to 16 times or higher, too. 

• Study the Market Cycle   

Commodity markets are highly cyclical, influenced by economics, geopolitics, demand, and supply factors. You may have a better chance of making profits if you are able to understand and capture the cycles as part of your research. 

Let’s use the most common of commodities - gold - as a point of reference to assess how cyclicality is established following demand and supply: 

• The demand for commodities might shoot up due to several factors. For instance, gold’s demand has historically always risen when geopolitical tensions come to the fore. 
• To cater to the increased demand, producers tend to increase their capital spending on production. 
• Due to higher demand and greater capital expenditure, the commodity price spikes. 
• Once the price reaches its zenith, buyers desist from purchasing the commodity, which leads to lower demand. 
• Low demand translates to a supply surplus, which is why, to revive the demand, manufacturers or producers reduce the price of the commodity. 
• Less demand also causes lower capital spending, which gradually lowers supply. 
• Through the above cycle, producers attain an equilibrium between demand and supply.  

As an investor, being well aware of the market cycle will help you place trades strategically and maximise profits. 

• Capitalise on Volatility

Some commodities, like agricultural products or copper, are extremely volatile. On the other hand, commodities like crude oil or gold are less volatile; they follow a definite trajectory within a broader and long-term trend. For instance, when the Covid pandemic was at its peak, oil prices plummeted and continued to do so for quite a while. So, what to keep in mind?

• Study the broader trend and your preferred commodity’s price range. 
• Select a comfortable lot size (amount of the item ordered for delivery).
• If you are new to commodity trading, start with commodities that are less volatile and then move on to more volatile ones. 
• Trading on excessive leverage may be risky unless you are an expert; losses can amplify very quickly if the market does not behave to your expectations.

That brings us to the end of this comprehensive chapter and module. We learnt that commodity trading offers diverse opportunities, blending raw materials with financial strategies to navigate market cycles and volatility. It stands as a vivid segment of the financial market.