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A beginner’s guide to entering the commodities market in India

30 Jan 2020

At some point in a person’s investment journey, commodities definitely catch traders’ fancy. Be it Crude oil, precious metals and base metals, all have drawn the attention of almost all investors at some time. The risks are a bit high, but a proper planning is what an investor needs to be a successful commodity trader.

Commodity trading is an interesting alternative for those who wish to diversify from traditional choices like shares, bonds, and portfolios. Multi-item exchanges have been set up in the country to facilitate this for the retail investors.

There are three national exchanges which allow traders to trade in commodities- Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange and National Multi-Commodity Exchange.

The Process of registering

To start trading in the commodity market one needs to go through various steps. A commodity broker or item broker is required which is very similar to the stockbroker in case of equity trades.

Every item broker needs documentation to open an account. The forms need disclosure of financial information and recognize the risks included in trading commodities. Financial data is complicated because items are highly leveraged assets, there is always a chance that one can lose more money than preliminary invested. A broker needs information on income, net worth, and creditworthiness. Not everyone who finishes the account forms is favorable to open a commodities account. A broker may use discretion on whether an expected customer is an acceptable risk and is suited to trade commodities. Enough income, trading experience and credit are critical factors of suitability.

Investors can also opt for an online broker. Once they opt for an online commodity broker, and they receive approval for trading, the next step is to fund the account. It is up to the person as to the amount of funding or account size when they open an account. One's comfort level and risk tolerance are essential considerations when funding an account. Before they start trading with actual money, it is necessary to develop a well-researched trading plan. Many items that the brokers offer requires experience and practice before putting capital to work.

A proper training will connect with the investors very closely with placing orders and could save the trader from making critical order entry errors. Keeping in mind that before investors start trading commodities online, they should choose trades wisely and ignore over-trading.

Other ways to trade

Another way to invest in commodities trading is through a futures contract, which is an agreement to purchase or sell a special quantity of an item at a set price at a future time. Futures are available on every group of the commodity. Traders use these contracts as averting towards the risks related to the price swing of a futures' implicit trade good or raw material. Trading in commodities includes high risk for investors and thus it is recommended to get your risk profile analysis before stepping in the market.

If you are new to the world of commodities it is better to opt for the services of a certified investment advisor who can guide you with the fundamentals of trading including trade recommendations and order placements.

Happy Trading!

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As On 30th April, 2020
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