How to Trade in Commodity Market: Commodity Trading Guide | 5paisa (2024)

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The discussion so far might have made you wonder how to trade in commodities. And why not? The commodity market offers immense potential for making profits. Moreover, since the commodity market remains open for more than twelve hours (for non-agricultural commodities), you can get more time to monitor the market and place trades.

Here is a laydown of the steps you need to follow to invest in the commodity market.

The following is a step-by-step guide to online commodity trading:

Pick a Commodity Broker

Earlier, commodity trading was very complicated, prompting retail investors to stay away from the commodity market. But, thanks to the Securities and Exchange Board of India (SEBI), investors can now indulge in online commodity trading without any hassles.

Brokers are classified into two categories - full-service brokers and discount brokers. Full-service brokers have many brick-and-mortar branches across the country, and they often charge higher fees due to higher establishment costs. Discount brokers follow a lean model and mainly operate online. Hence, they usually charge lower fees and may offer higher benefits.

Full-service and discount brokers may offer free/paid commodity recommendations, free trades, low brokerage, and free account opening. Before choosing the broker, it is wise to evaluate the costs and services. Moreover, you must read some reviews about the broker to make the right choice.

Open a Demat and Trading Account

Once you have finalised the broker, it is time to open a Demat and Trading account. Demat and trading accounts are mandatory for trading in the commodity market.

If you are considering opening a Demat and trading account, you need to submit your PAN card, Aadhar card, age proof, income proof, and bank account statement. Brokers allow online uploading of documents and send the account information to your registered email address within one business day. However, your application will be subject to detailed scrutiny to evaluate your eligibility.

Since online commodity trading is mostly leverage-based, checking the investor’s income status is crucial for the broker to minimise risks.

Make The Initial Deposit

Once the broker sends you the account details, you need to make an initial deposit. Try depositing about 10% of the contract value of the commodity you wish to trade, along with a maintenance margin.
For example, if the margin money for trading a commodity is INR 40,000, you need to make a deposit of INR 4,000 plus the maintenance margin. The maintenance margin is essential to compensate for any losses should the market goes against the perceived direction.

Now that you know how to trade in the commodity market online let us find some ways to increase your profits.

Understand The Market Cycle

Commodities generally follow a cycle to increase and decrease. Take any commodity, and you can find that the price frequently increases and decreases. Expert traders ride these price swings to make money from the commodity market.

Most commodities follow a cyclical pattern. For example, when the demand for a commodity shoots up, the manufacturer’s capital expenditure increases. When the capital expenditure increases, the company increases the commodity’s price. And, when the commodity’s price increases, people buy less, which results in less demand for the commodity. When the demand dries up, the company reduces the capital expenditure and the commodity’s price decreases.

It is crucial as an investor for you to understand the cyclical nature of the commodity you are trading and place the trades at reasonable prices.

Respect Volatility

If you are investing in commodities for the first time, the volatility or wild price swings might make you nervous. The problem increases when you trade on excessive leverage. Since commodity brokers often provide leverage of up to 16 times, any losses may quickly magnify themselves into an outrageous figure.

Hence, before learning how to trade in commodities, you must observe how commodities move and find their price range. A quick scan of the top commodities suggests that agricultural commodities and metals like copper are more volatile than gold or crude oil commodities.

So, if you are a beginner, a wise step would be to trade in less volatile commodities before moving to highly volatile commodities.