Trading in Commodities in India (Cash & Derivative Segment)

03/10/2020 0 By indiafreenotes

A tradable commodity can be bought and sold, just like you trade in equity/shares. You buy a commodity, expecting future Price appreciation. When the future price hits the target, you sell it. This is the modus operandi. On the other side, sellers of a commodity sell it when they think there is no room for appreciation for future price. Open a demat account today.

Even today in villages, farmers exchange commodities among themselves. In the organized commodity trading world, things are a little different. Commodity trading is regaining its importance among investors. This trading happens on a commodities exchange, where various commodities and their derivatives products are bought/sold. The most commonly traded items are agricultural products and contracts based on them. But, increasing non-agro commodities are also being traded like diamonds, steel, energy items etc.

There are two sides to the same coin. Commodity trading has its own advantages and disadvantages.

The advantages include commodity futures are highly leveraged investments, which means with a relatively small amount of money you can take a bigger bet. Commodity future markets generally are very liquid, which means entry and exit are easy. Commodity futures can potentially give huge profits, if traded carefully and smartly

The disadvantages of commodity futures trading are that markets are volatile, which means risk is higher. Direct investment in the commodity markets is of high-risk, especially for new investors. So, be careful. Gains and losses are magnified by leverage, which means you win big or lose big.

Cash commodities or “actuals” refer to the physical goods, e.g., wheat, corn, soybeans, crude oil, gold, silver that someone is buying/selling/trading as distinguished from derivatives.

Cash Market

Derivative Market

Purchase even one share In case of futures and options, the minimum lots are fixed
Tangible assets are traded In derivatives contracts based on tangible and intangible assets are traded
Cash markets are used for investment Derivatives are used for hedging, arbitrage or speculation
Customer must open for trading account For futures, a customer must open a future trading account with a derivative broker
Entire amount is put upfront In case of futures, only the margin money needs to be put up
The owner of shares is entitled to the dividends The derivative holder is not entitled to dividends