Understanding Commodities Trading: A Beginner’s Guide For Indian Investors

Commodities trading allows Indian investors to diversify beyond stocks by investing in raw materials and goods, though it carries its own set of risks including high volatility and the potential for significant losses. Investors should carefully consider their risk tolerance before entering this market.

Commodities trading refers to the act of buying and selling goods such as metals and agricultural products or energy through standardised contracts traded on an exchange. While stock market trading is essentially ownership in a company, commodities trading is about buying and selling products that are considered important to numerous industries. In India, commodities trading on special exchanges is regulated by the Securities and Exchange Board of India (SEBI).

In this guide, we’ll walk through how commodities trading works, how it differs from stock trading, and how someone new might begin.

Table of contents

• What exactly is commodities trading?
• Why trade commodities?
• Types of commodities: hard vs. soft
• What drives commodity prices?
• How can you trade commodities?
• Key terms you should know
• When commodities may appear suitable to some traders
• Comparing technical vs. fundamental analysis in commodities
• How beginners may approach commodity trading
• Common mistakes beginners may make

What exactly is commodities trading?

Commodity trading involves margin requirements where you deposit only a fraction of the contract value. This creates leverage that can amplify both gains and losses. Most futures contracts have daily settlement, and if not closed before expiry, may require physical delivery or cash settlement depending on the contract specifications.

These contracts include futures and options, and their prices tend to reflect global supply and demand, currency movements, and event risk.

Why trade commodities?

• Diversification: While commodity prices often move differently from equities, which may help balance a portfolio during stock market corrections, they can also be highly volatile and subject to their own market risks.
• Hedge against inflation: Since commodities are real goods, their prices may rise in some periods when currencies lose value.
• Exposure to global themes: Commodity prices often reflect global economic trends and demand–supply imbalances, which may create potential opportunities.
• Longer trading hours: Indian commodity market sessions extend into late evening, overlapping with international markets.

Read Also: Trading Basics: History, Benefits and How Does it Work?

Types of commodities: hard vs. soft

Commodities are grouped broadly into two categories: hard and soft.

Hard commodities

These are natural resources that are mined or extracted. Examples include metals like gold and energy resources like crude oil. Hard commodities often have to be obtained through mining or drilling, and they tend to be staples of industrial economies. In India, many hard commodities are primarily traded on MCX (Multi Commodity Exchange), though some may also be available on other exchanges or through international trading platforms as permitted by applicable regulations.

Soft commodities

Soft commodities are often seasonal since factors like weather and harvest cycles affect their supply. While many agricultural commodities in India are traded on NCDEX (National Commodity & Derivatives Exchange), some may also be available on other exchanges. Agricultural commodities may be subject to specific regulatory measures such as price limits and position limits as per applicable market regulations.

What drives commodity prices?

Commodity prices are influenced by multiple interacting factors that can vary significantly in importance across different time periods and market conditions. Historical price patterns may not repeat, and the relative impact of these factors can change unexpectedly.

• Supply constraints: Disruptions in production, mining, weather events, or logistics bottlenecks may reduce supply and push prices up.
• Demand changes: Industrial growth, consumption trends, or changes in energy policy may increase demand.
• Currency strength: Commodities are often priced in USD globally; if the home currency weakens, the local cost may increase.
• Geopolitical events: Conflicts, sanctions, or trade policies may create supply shocks.
• Macro variables: Inflation, interest rates, GDP growth, or changes in global trade dynamics may influence the outlook.

How can you trade commodities?

Indian investors may explore commodities through various routes, including futures and options contracts on MCX or NCDEX, which carry significant market risks and may not be suitable for all investors. Other options include commodity ETFs, index or broad-based commodity funds, and mutual fund schemes that invest in commodity derivatives.

All commodity investments are subject to market volatility, and investors should understand the risks before investing. Past performance is not indicative of future results.

Key terms you should know

Before entering commodities trading, understanding the following common terms might help:

• Spot price: Price for immediate delivery.
  Futures contract: Agreement to buy or sell at a future date at a set price.
• Margin: Collateral required to hold futures positions.
• Leverage: Borrowed or additional exposure over your principal; significantly amplifies potential gains but can lead to losses exceeding your initial investment, potentially resulting in substantial debt obligations.
• Contract size: The fixed standard quantity per futures contract.
• Contango and backwardation: When futures prices lie above (contango) or below (backwardation) the spot price.
• Tick size: Minimum price increment per contract.
  Open interest: The total number of outstanding derivative contracts.

When commodities may appear suitable to some traders

Commodities trading may be considered during situations such as:

• When equity markets are facing a correction and some traders seek exposure to non-equity assets, though commodities may also experience significant volatility and may not provide expected diversification benefits.
• If investors observe evident signals in supply constraints or demand growth for certain raw materials.
• When commodity markets may appear undervalued to some market participants.
• When investors have risk capital they can afford to lose, as commodity markets can experience extreme volatility that may result in substantial or complete loss of investment.

Comparing technical vs. fundamental analysis in commodities

Both methods can be used by commodity traders with different emphases:

• Fundamental analysis studies real factors like supply, demand, inventory data, import–export policy, and monetary conditions.
• Technical analysis uses price charts, trend lines, and indicators (RSI, moving averages) to identify potential entry or exit levels.

Many traders may combine both—using fundamentals to identify themes or direction, and technical tools to time trades.

Read Also: What is Online Trading? Meaning, Benefits & How it Works?

How beginners may approach commodity trading

1. Open a commodity derivatives account with a SEBI-registered broker who supports commodity segments including MCX, NCDEX, and NSE. Ensure you receive and understand the mandatory risk disclosure document for commodity derivatives trading as per applicable SEBI guidelines.
2. Complete comprehensive KYC compliance as required under applicable SEBI regulations, including risk profiling and suitability declarations.
3. Gain exposure by selecting the commodity of interest (precious metals, energy, agricultural, or commodity indices) and a suitable instrument (futures, options, mini contracts, or index derivatives). Different commodity categories have specific regulatory requirements and position limits as per SEBI guidelines.
4. Some traders may consider starting with smaller lot sizes and limiting exposure in line with their individual risk tolerance, as commodities can be highly volatile.
5. Learn risk management: set stop losses, use position limits, and avoid over-leveraging.
6. Use both analysis styles to guide trade considerations.
7. Monitor positions regularly.
8. Stay updated on news related to supply, global demand, weather, and policy changes.

Common mistakes beginners may make

• Excessive leverage, which significantly magnifies losses and can deplete trading capital rapidly. Applicable SEBI guidelines outline leverage limits for different instruments.
• Ignoring margins and periodic settlement obligations.
• Neglecting risk management.
• Overreliance on one form of analysis.
• Trading too many commodities simultaneously, leading to diluted focus.
• Ignoring regulatory or delivery obligations.
• Not keeping abreast of macroeconomic or policy developments.

Conclusion

In summary, commodities trading may offer diversification opportunities for Indian investors beyond traditional stocks while also introducing distinct risks including higher volatility, leverage effects, and global market exposures that must be carefully managed. By understanding how commodity markets function, the nature of risks involved, and the analytical approaches used, beginners may make more informed decisions as they enter this space.

While commodities may potentially help hedge against inflation and global uncertainties, they may also require active learning, disciplined risk management, and ongoing awareness of global trends. If approached with caution and preparation, commodities trading may serve as one of the tools to broaden an investment portfolio in today’s dynamic market environment.

FAQs

What are commodities, and how are they different from stocks?

Commodities are raw goods or resources or their derivative contracts, while stocks represent ownership in companies.

What are the main types of commodities?

The two categories of commodities are hard commodities (metals, energy, and goods that are mined) and soft commodities (agricultural products and livestock).

What factors influence commodity prices?

Supply constraints, demand shifts, currency movements, geopolitics, inventory levels, storage costs, and macroeconomic changes may affect commodity prices.

What are the common ways to trade commodities?

You may trade futures and options on commodity exchanges, invest via commodity ETFs or mutual funds, or hold precious metals in their physical form.

Is trading commodities risky for beginners?

Yes, commodity trading carries significant risks, particularly for beginners. These risks include leverage that can amplify losses, high price volatility, macroeconomic uncertainties, and complex contract mechanics.

Do I need to use both technical and fundamental analysis?

While combining fundamental and technical analysis can provide a broader view, neither approach guarantees successful trades.

When is the best time to trade commodities?

Some traders monitor periods of volatility or supply–demand shifts, though market timing remains uncertain.

What mistakes should new traders watch out for?

Overleveraging, undisciplined trades, ignoring contract expiry or delivery conditions, emotional decisions, and not paying attention to fundamentals.

How can beginners approach commodity trading?

Open a commodity derivatives account with a SEBI-registered broker who supports MCX/NCDEX segments. Complete KYC and follow regulatory guidelines. Some traders may consider beginning with small exposure and using stop-loss limits.

Can commodities act as a hedge against inflation?

They may potentially serve as an inflation hedge, though the relationship is not guaranteed and varies across commodity types and market conditions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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