Well, Today’s article is going to be very interesting because of the topic on which we are going to talk today. Thousands of people are curious about what is commodity trading you have to learn how you can do commodity trading.
When we talk about the commodity market, many people may not be aware of it. But in this article, my effort will be that even if a child is in class six, then all the concepts should be crystal clear to him. Step by step we will proceed. But I will start this article with a story.
Commodities:
When we talk about commodities, you are reading inside the commodity market. I said you trade in two ways. One you trade in a futures contract which we call futures trading. The second is called option trading.
- Futures trading.
- Option trading.
Types of Commodities:
This happens in two segments, Non-agricultural commodities and one is Agricultural commodities. Non-Agriculture and Agriculture, first of all, understand the meaning of commodities.
Commodity means anything that we get from Mother Earth that nature gives us that we cannot make ourselves. we cannot make gold by sitting in the home. The earth will give you gold, so if we are getting anything from nature, then it is a commodity.
Now we have Non-Agriculture which is not Agriculture, which is not farming. If the thing is cultivated, then it is Agriculture, so Non-Agriculture which is not cultivated.
Non-Agriculture Commodities:
In Non-Agriculture There are three segments in.
The first segment is energy. Now let me tell you what we talk about inside it, Non-Agri and Agri. There is 88% inside the Non-Agri market and there is only 12% trading in the Agri market. Now, when we buy stocks then we buy products through any exchange, such as BSE and NSE, then you can trade inside BSE and NSE.
Similarly, commodity trading happens on basically two exchanges. The exchange of Non-Agri Commodity Exchange is MCX, Multi Commodity Exchange and The exchange of Agri Commodities is NCDEX, National Commodity Derivatives Exchange, so here 12 percent of the volume is coming, it is coming of Agri Commodities and 88% trading is happening in Non-Agri Commodities.
First let me tell you the segment inside Not Agri trading, After that, I will tell you which trading is happening. when we talk about energy, inside energy, crude oil, natural gas, and coal. If we talk about base metals, there are multiple metals, then copper aluminum, and zinc are included and there are gold, silver, and Platinum included in precious metals. Out Of these, the highest volume of trading comes in crude oil copper silver, and gold Most of these are traded.
Trading in Commodities:
Most of these are traded. Now some people say when you are trading in the commodity market, then you have already understood futures and options in the stock market, then you trade in the lot, similarly, there are lots there, for example, there are lots in crude oil and also Gold has lots.
Now one lot of gold is one kg. For this, when you talk about 1kg. On today’s date, you say that today the gold rate is 50000 of 10 grams. Then 1kg gold is worth ₹ 5000000, then if you are trading in gold, you get margins, people say that it needs a lot of investment If we do commodity trading.
We have to invest a lot of capital. But let me also tell you that if you talk about contracts inside it, then there are multiple contacts inside gold as well. There is gold Gini, there is gold petal then you can trade multiple contracts inside the gold You have to understand that when you are trading different commodities, there are different margin requirements, and they have different prices it, then I will show you the screen that approximately you will have requirements of different margins in different commodities, your broker gives you margin, we will talk about margins.
There are wheat, soybean, chicken peas and sugar, black paper, and rubber inside Agri commodities, there is trading on them, so when we talk about all agricultural commodities, then all do not Trade, basically which derive the Market, they traded. Now, what is the meaning of the margin I talked about?
As an example, if you have to trade of ₹ 100000, but you don’t have ₹ 100000, then your broker, as an example, has an account with Upstox, and they give you a margin. It means that you have to trade for rupees one lakh, profit should be rupees one lakh, but we have only rupees twenty thousand. So, can we trade rupees one lakh with rupees twenty thousand? The answer is yes but because the broker gives you the remaining 80k put he sets the margin in profit and if your 1 lac trade is success the profit you will get according to to margin.
Why Should We Trade in The Commodity Market:
Now, why should we trade in the commodity market, then I am giving you the answer When we talk about the stock market. That’s why I am giving you the answer. I will tell you this, your stock market is open from 9:15 to 3:30.
But the commodity market is open from 9:00 am to 11:30 pm, so I will give you a real example. Just some time ago I went to get a mobile phone for my wife, so I took it from Croma. as you all know Croma, there was an employee there.
He already knew me, so he said that I saw many videos in your stock market. But I am not able to trade in the market. Its reason is that this is the timing of my job, so I am free around 5:00 in the evening, so I can not give my time because the timings of the market and timings of my job do not match.
I can’t do it, so can we trade in the commodity market? The answer is yes, you can do it Because it is open till 11:30 in the night then it is open till 11:30, we will also talk about it and the other thing I am telling you is why you should do trade, the other thing that comes.
The Story of Two Farmers:
This story is about the two farmers, who are these farmers let me tell you. One is a farmer whom you can call a farmer and the other who is a farmer is the Kissan company, here you eat tomato ketchup and jam of the Kissan company.
So here we are talking about 2 farmers. so there is a farmer whose entire cultivation is of tomato, then he is the farmer who cultivates tomato and on the other side it is the kissan company which bought tomatoes from the farmer and it makes ketchup and sells in the market, so when we are talking about two farmers, then I would like to tell you about both, which is our first farmer who is growing tomatoes,
who have farms. He is worried about the fact that this time I have spent a lot of money. This time I bought a tractor, I raised money from the market at interest. This time I have applied pesticides and don’t know how many things I applied in my farming.
I have invested a lot and if this time the rate of ₹ 50 is going on in the market of tomatoes and if the rate falls, then I will be ruined. If this rate comes to 45 and 40 then I will make a loss. Yes, I will make a profit if it goes above 50 to ₹60.
But this farmer is afraid that this time the rate of tomatoes in the market may fall. It can come below 40 and the farmer who is here will suffer loss. On the other hand, the factory we are talking about is our Kissan factory.
Now the one who owns it here is also afraid, he has to make ketchup, he buys tomatoes from the market and he sells them in the market and for example, he sells ketchup bottles for 100. Now there is a bottle of ketchup for 100.
You must have seen generally, that whatever you buy from the market, there is a stagnant price for a long time. If you are buying a Dairy Milk of 10, then it will not happen that it will be of rupees 12 yesterday.
It will remain only 10. If we are talking about Kissan Ketchup, I do not know what the rate is today’s date. But if it is of 100, it will not happen that if the tomato rate increases tomorrow, they will start selling 120 instead of 100.
They will increase after some time. What is the problem that if once the rate has increased, and after that, if the tomato rate is decreased then it cannot bring it down?
The person who is running the factory for the Kissan has a fear that this time the tomato rate is going to grow very much, it may be 80 or ₹ 90. If they are giving a rate of ₹ 50 today in the market and tomorrow it will increase to 80 or ₹ 90, it will be a loss because, in the market, he will have to sell a bottle of ₹ 100, where the owner of the Nissan factory has a fear that if the rate increased, then there will be my loss and even if the rate is reduced, there will be my loss.
Hedge:
Now, if the farmer is growing tomatoes here if he makes a contract with Kissan the company that whatever I am cultivating today, you will buy it for ₹ 50, and if you just contact that after 3 months and if he will contract here I will purchase it at the rate of 50 rupees after three months because both are afraid.
He has an opinion that if the rate is reduced, he will get in trouble and he is afraid that if the rate increases then it will be a loss for him. Then if people get a surety of this way there will be no loss to us, called hedge in the technical term. It is called hedging, the big institutes which are doing business at a large level, their positions So the concept which you have understood is a contract. You can call it a forward contract, and you can take an advanced version of it, a Future contract Now let’s understand what option contracts are, and what are options.