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What Is Commodity Trading in India: Basics and FAQs

This blog will answer the FAQs on commodity trading in India. Find out if commodity markets are better or worse than stock markets. Learn about the alternatives to commodity trading in India.
January 19, 2021

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Commodity trading may be considered as the lesser-known cousin of stock trading. Instead of equity, it gives investors access to 100+ commodities like sugar, cotton, silver, etc. 

In this blog, we will look at some of the most important questions surrounding commodity trading in India. Along the way, we will try to figure out how commodity trading compares to stock trading. 

Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth. 



Where To Invest In Commodities?

Investors trade commodities like crude oil, natural gas, silver, cotton, etc. in the commodity market The commodity market can be a physical or virtual marketplace.

If it’s a physical marketplace, investors will usually own the commodity and trade it for cash or cash equivalent commodities. A virtual commodity market, however, generally includes commodity exchanges.

Most virtual commodity investors have no interest in physically owning the commodity. The main interest lies in profiting from the price differentials that may arise due to supply and demand or other factors.

Read this blog to know about commodity mutual funds

How To Invest In Commodities?

There are 6 major commodity exchanges in India. In terms of market share, the three biggest commodity exchanges in India are:

1. Multi Commodity Exchange (MCX)

2. National Commodity & Derivative Exchange (NCDEX) 

3. National Multi Commodity Exchange of India (NMCE)

The remaining commodity exchanges include:

1. Indian Commodity Exchange – ICEX

2. Ace Derivatives Exchange – ACE

3. The Universal Commodity Exchange – UCX

Commodity investors use a peculiar financial vehicle called futures contracts to trade on these commodity exchanges. Let’s see what that is. 

Read this blog to know more about commodity markets in India. 

What Are Futures Contracts?

Investors enter into futures contracts to trade commodities. A futures contract is a legal agreement between a buyer and a seller that carries a fixed price and a fixed date of sale/purchase of the commodity.

Futures contracts adhere to the Forward Contracts (Regulation) Act, 1952. But commodities aren’t the only assets that are traded using futures contracts. 

Arbitrage funds also leverage arbitrage opportunities to generate a profit. Read this blog to know more. 

What Are The Advantages And Disadvantages Of Commodity Futures?

 

Advantages Of Futures

Disadvantages Of Futures

Transparent pricing

Expiration date

High liquidity

Affected by natural disasters

Hedge against inflation

Prone to geopolitical risks

Commodity futures may be suitable for the short term and long term. However, it is prone to various risks that span from geopolitical threats to natural disasters.

P2P lending, an alternative asset, can provide another avenue to fulfil both your short and long term goals with comparatively lower risk. Read this blog to know more about P2P lending options in India. 

What Are Exchange Traded Funds?

Another way to invest in commodities includes Exchange Traded Funds (ETFs). ETFs are unique in that they combine the features of both mutual funds and stocks.

In general, ETFs are mutual funds that can be bought and sold like stocks. This naturally means that ETFs are listed on major exchanges. ETFs track the value of the underlying investment that may be:

  • Index
  • Commodity
  • Sector 

In India, ETFs are allowed to invest in only 1 commodity, gold. However, there are 1000+ mutual fund schemes that you can invest in based on your risk profile and goals. 

Read this blog to know more about the best mutual funds for 2021.

Comparing Commodities Vs Stocks

 

Parameter

Commodities

Stocks

Ownership

Goods like Oil, natural gas, gold, silver, cereals, etc.

Shares of Tesla, Google, Amazon, Facebook, etc.

Inflation

May fare better

May fare worse

Liquidity

Moderately high

High

Volatility 

High

Moderately High

Available on Cube

No

Yes


Conclusion

Overall, commodity trading offers investors the chance to diversify by profiting from price movements of commodities like cereals, crude oil, pulses, cotton, silver, gold, etc. 

However, commodity trading carries several unknowns while commodities themselves are affected by geopolitical, environmental, and supply & demand risks.

There are alternatives to commodities like US stocks and International mutual funds that offer geographical diversification and opportunity to leverage currency appreciation in several countries. 

The Cube Wealth app helps you invest in the best US stocks for as little as $1 with advice from RIA, Rick Holbrook. Cube also gives you access to industry-leading advice from Wealth First, Cube’s mutual fund advisor.  

Download the Cube Wealth app to know more about US stocks and International mutual funds. 

Watch this video to learn more about US stock advice on Cube Wealth




Shriram Shekhar
Shriram is a Consultant at CubeWealth. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. His love for philosophy, developing products, and empowering people through quality content is what got him to CubeWealth.

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