Electronic trading has revolutionized the financial markets in India and around the world. The introduction of electronic trading in 2003 has boosted the number of active traders and investors in the market. The commodity trading market has grown by over 120 times since 2003, but still there is a lot more potential for the growth of commodity trading in India.
Commodity trading in India is done through commodity exchanges. The MCX or Multi Commodity Exchange of India is the largest in the world for Silver trading and the second largest for Gold, Copper and Natural Gas. It ranks third for crude oil futures trading.
The crude oil futures are amongst the most actively traded commodities in the world and therefore offer very high liquidity. Let us discuss about commodity trading in oil and crude oil futures from the beginner’s level. Before we begin, let us have a brief overview about commodity trading in India.
1. What is Commodity Trading:
Commodity trading has picked up a rapid pace in India. It is considered as a great alternative to the conventional stock trading an investing. Let us understand, what is commodity trading and also discuss about the advantages and disadvantages of trading in commodities.
Any goods which is used in commerce and can be interchanged with other goods of same types are known as commodities. Some of the examples of commodities include crude oil, gold, silver, natural gas, soybean etc. Commodity market has been attracting investors and traders from long time because trading and investing in commodities is considered as a great initiative for diversification of portfolio beyond traditional stocks. Traders also rely on commodity market during the times of market volatility to balance out their portfolios.
There can be number of ways for investing in commodities. These includes commodity futures contracts, Exchange traded funds (ETFS) and options. Commodities are broadly classified into three categories, namely metals, energy and agriculture.
2. Trading in Oil:
The oil market is bigger than all the metal commodity markets combined together. The oil market is one of the most liquid commodity markets in the world due to large demand and supply. Oil is the primary source of energy for multiple sectors, which has led to a very high demand. In order to be a successful trader in oil, you need to understand the principle of demand and supply, which is the basic principle of working for the commodities market.
The global market for crude oil was over 94 million barrels per day in 2015 and has grown significantly afterwards. This translates to a valuation of $ 1.7 trillion per year with today’s prices, which is far more than all the metal markets combined. The world’s largest metal market by valuation is Gold which is valued at $170 Billion. The largest market by tonnage in the world is the Iron Ore market.
2. Trading in Crude Oil Contracts (MCX):
Trading in crude oil futures is mainly done with the objective of speculation rather than delivery trading. It is important to have a technical and fundamental analysis for trading in crude oil. Trading in oil without a proper strategy can result in huge losses. Zeta Crude can help you in crude oil trading by providing research-based recommendations.
The daily volume of crude oil futures which are traded on the MCX is over Rs. 3000 crores. It is one of the most actively traded commodities on the MCX. There are mainly two types of crude oil contracts which are traded on the MCX – Crude Oil and Crude Oil Mini. The lot size for Crude Oil is 100 barrels and the expiry is 19th or 20th of every month whereas the lot size for Crude Oil Mini is 10 barrels and the expiry is 19th tor 20th of every month. Traders prefer Crude Oil Mini due to the smaller lot size, which translates to a lower margin requirement.
Conclusion
It must be noted that oil futures are highly volatile and should be traded very carefully. Any wrong decision can wipe out a considerable portion of your capital. If you are not experienced with oil trading, it is better to take some guidance from an investment advisor before trading on your own. However, if done with proper research and planning, crude oil trading can prove out to be a very lucrative trading option for you.
Happy Trading!
