FAQs about commodity trading

Commodity trading, as the name suggests is a type of investment that allows investors to purchase and sell different types of commodities. It is a unique type of investment, serving as an alternative asset which an investor can liquefy as per the terms and conditions of his futures trading contract. The future trading contract, also known as a buyer-seller agreement is a contract under which the buyer agrees to pay the seller a particular sum at a future date, when the seller delivers the commodity. Here are some of the most common trading faqs.

FAQ 1: What is commodity market?

Answer: Commodities are simply products that are used for commercial purposes, which are traded on a specially authorised commodities exchange. It is the exchange on which a diverse group of assets necessary for everyday life are traded. Movable goods which can be purchased and sold are traded on the commodity market.

FAQ 2: What are the commodities traded in the commodity market?

Answer: A wide range of commodities are traded in the commodity market but are broadly categorized as Agricultural commodities and Natural resources. Agricultural commodities such as pulses, crops, spices etc. are regarded as soft commodities whereas natural resources such as metals, energy, gold and silver bullion, fibre etc. are regarded as hard commodities.

FAQ 3: How many commodity trading exchanges are there in India where I can conduct trades?

Answer: There are six commodity trading exchanges in India. They are:

• National Commodity and Derivatives Exchange or NCDEX
• Multi Commodity Exchange or MCX
• National Multi Commodity Exchange or NMCE
• Indian Commodity Exchange or ICEX
• Ace Derivatives Exchange or ACE
• The Universal Commodity Exchange or UCX

FAQ 4: When can I trade in commodities?

Answer: Commodity trading can be conducted on all platforms every Monday through Friday (except on bank or national holidays). Trade in agricultural commodities can be conducted from 10:00 a.m. to 5:00 p.m. on weekdays, whereas natural resources can be traded from 10:00 a.m. to 11:30 p.m. on weekdays.

FAQ 5: What are the different types of commodity markets in India?

Answer: There are 4 different types of commodity markets in India. They are:

Commodity spot markets in which buyers and sellers enter into a contract for immediate delivery.

1. Commodity forward markets where buyers and sellers enter into a contract for delivery of commodities at a later date.
2. Commodity future markets where buyers and sellers pre-decide the time and price for delivery of commodities in advance while entering into the contract.
3. Commodity Options Markets in which the buyer has limited risk up-to the extent of the premium paid, whereas the seller earns limited profits up-to the extent of the premium received.

FAQ 6: Can I conduct my commodity trade electronically?

Answer: Yes you can conduct your commodity trade electronically. You can conduct commodity future trading in the three main commodity exchanges i.e. the NCDEX, MCX and NMCE as all of them have electronic trading platforms along with settlement systems, with a national presence. You can conduct the trade electronically through your bank account. You can also open a separate commodity trading demat account from NCDEX. However, you should read up about commodity demat account FAQs before opening the account.

FAQ 7: Is it risky to trade in commodities?

Answer: Just as it is with equity trading, there is a certain risk of trading in commodities as well. That said, you can limit your risk. Risks can be limited by placing stop losses and by trading in options. However, you need to be well-informed and have a higher risk appetite for this type of activity.

Maithili Pawar is a finance professor. She has written on share market basics. Through this article, she has provided detailed information on stock market.