Basics of Commodities Trading!!

Why Commodities

Investors looking for a fast-paced dynamic market with excellent liquidity can now trade in Commodity Futures Market.

Commodity is an asset class that is negatively correlated to equity markets & this feature helps in providing diversification to one’s portfolio.

Commodities tend to be less volatile than equities & the margins to be paid upfront are lower than in equity F & O Markets. This gives the trader/investor more Leverage & better risk-adjusted returns.

Hedging: Mitigate your risk of commodity price fluctuations.

Arbitrage Opportunities: Take the advantage of price spreads, calendar spreads.

Prices are pegged to International Markets of NYMEX, CBOT, CME, LME.

National Level Commodity Exchanges In India Offering Trading Facilities In Multiple Commodities.

National Commodity & Derivatives Exchange (www.ncdex.com)
Multi Commodity Exchange of India Ltd. (www.mcxindia.com)

Intra Day Fluctuations In Commodities Market

All major international commodity markets have an impact on the price fluctuations of Indian Commodities market. The timings of the same is as mentioned below.

Tokyo: 5:00am – 10:30am
Hong Kong: 6:30am – 12noon
Singapore: 8:00am – 1pm
London Metal Exchange: 1:50pm – 10:00pm
New York Mercantile Exchange: 5:50pm – 11:30pm
India (MCX & NCDEX – Metals& Energy): 10:00am – 11:30pm
India (MCX & NCDEX – AGRI): 10:00am – 5:00pm

How Is Commodity Derivatives Market Different From Equity Derivatives Market

Underlying Asset
Commodity Derivative : The underlying is a commodity
Equity Derivative :The underlying is equity.

Research
Commodity Derivative : Research is global. It requires study of macroeconomics of world economies & demand supply situations. Etc.
Equity Derivative :Research requires study of Balance Sheets, P/E Ratios

Trading Hrs.
Commodity Derivative: 10am to 11:30pm
Equity Derivative:10am to 3:30pm

Settlement
Commodity Derivative:Cash or Delivery based settlement.
Equity Derivative:Cash Settled

Volatility
Commodity Derivative:Low
Equity Derivative:High

Leverage
Commodity Derivative:High
Equity Derivative:Low

Demat A/c
Commodity Derivative:Required only for deliveries.
Equity Derivative:Mandatory

Initial Margin
Commodity Derivative:5 to 10% of the contract value.
Equity Derivative:Approx. 25% of the contract value.

Price Movement
Commodity Derivative:Purely based on demand & supply.
Equity Derivative:Based on expectation of future performance.

Which Commodities Are Available For Trading

Precious Metals Gold, Silver
Base Metals Steel, Copper, Aluminum, Zinc.
Energy Crude Oil, Brent Crude Oil, Furnace Oil.
Cereals & Pulses Wheat, Rice, Chana, Urad, Tur, Guar, Guargum, Soyabean
Condiments Sugar
Cash Crops Cotton, Jute
Oil Complex Castor, Soya, Mustard, Mentha Oil
Spices Chili, Turmeric, Jeera, Pepper

Commodity Margins & Lot Sizes

The margin ranges between 5% to 10 % of the contract value.

However the change in value of commodity from the price at which you made the purchase/sale with reference to the daily settlement price reflecting a proportionate gain or loss. The loss, if any has to be paid up as Mark to Market Margin

Commodity Lot Size Margin (Rs.)
Gold 1Kg 70,000
Silver 30Kg 50,000
Gold Mini 100gms 25,000
Silver Mini 5Kg 25,000
Copper 1MT 40,000
Crude Oil 100 Barrels 25,000
Soyabean 10MT 10,000
Chana 10MT 20,000
Sugar 10MT 20,000
Jeera 3MT 25,000

Return on Investment

Commodity Average Intra Day Movement Return (Rs.)
Gold Rs. 60 – Rs. 100 Rs. 100 / 1 Rupee Movement
Silver Rs. 100 – Rs. 300 Rs. 30 / 1 Rupee Movement
Crude Oil Rs. 30 – Rs. 60 Rs.100 / 1 Rupee Movement
Urad / Chana Rs. 40 – Rs. 60 Rs. 100 / 1 Rupee Movement
Sugar Rs. 15 – Rs. 25 Rs. 100 / 1 Rupee Movement
Mentha Oil Rs. 10 – Rs. 30 Rs. 360 / 1 Rupee Movement
Copper Rs. 3 – Rs. 8 Rs. 1000 / 1 Rupee Movement
Zinc Rs. 2 – Rs. 5 Rs. 5000 / 1 Rupee Movement