Commodity Analysis

Key lessons on commodity trading

Bavadharini KS | Updated on August 30, 2020 Published on August 30, 2020

Before trading, study the commodity market to avoid unnecessary risk and losses

Like the equity market, the commodities market, too, is an investment segment for investors looking for diversification. For those who want to start investing in commodities, here is what you should know.

Basics

The first step towards commodity trading is the selection of a broker. As technology progressed through the years, the face of trading in India has changed and online (or discount) trading came into existence. Now, with lockdown measures in place to contain the spread of the coronavirus, trading online has gained momentum. You can trade commodities, too, online.

Discount or online brokers will offer you an online trade platform for relatively lower brokerage. However, you may not always have an adviser to help you trade or provide research reports.

Mohit Mehra, Business Analyst at Zerodha, says: “A trader should decide a broker (online or traditional) based on the trading experience on the brokers’ platform, brokerage and other charges levied, and the ease of opening an account.”

The brokerage fee charged by traditional brokers such as Reliance Securities and Kotak Securities would usually be 3-5 paisa on the contract value traded or it could be higher. For instance, Reliance Securities charges 5 paisa on commodities futures and 50 paisa on commodities delivery.

So if you are buying a commodity futures, say, gold (100 grams) for ₹30,9500, the brokerage will work out to ₹154.75 (5 paisa on the executed order of ₹30,9500). On the other hand, for discount brokers such as Zerodha and Upstox, the brokerage is lower comparatively.

Zerodha charges lower of ₹20 or 0.03 per cent per trade, irrespective of the contract value. The maximum brokerage levied is ₹20.

Note that there are other charges in addition to brokerage. Some brokers levy annual maintenance charges and account-opening charges. Also, GST of 18 per cent will be charged on brokerage plus transaction charges, and 0.01 per cent on sell side as STT/CTT (Security/Commodity Transaction Tax) on commodity futures (non-agri) will be levied (0.05 per cent sell side — commodity options).

Also, make sure to check out the broker’s reputation in the market before you sign up.

Documentation

Once you decide on your broker, you will have to open a commodity demat account, for which you will have to provide identification and address proof. In addition, you should provide bank account details to complete your KYC norms.

If you open your commodity account online (for which Aadhaar details should also be provided), the activation will happen within 24 hours. Offline, the account activation happens within 48-72 hours.

Trading in commodities

Carefully choose the commodity you wish to trade and understand the market, to avoid unnecessary risk of loss.

To trade on any commodity contract, you need to pay upfront the initial margin of 5-10 per cent (minimum) of the contract value. The contract value is the lot size multiplied by the market price. For instance, one lot of gold petal contract on MCX, which is 1 gram, costs ₹5,222 currently. The initial margin on this contract is around 6 per cent. There are small lots in silver, copper and aluminium on MCX, which you can consider.

Commodities that are traded in large lots will have a higher contract value, and thus a higher margin requirement. A beginner should thus choose small contracts. Last week, MCX launched bullion index futures contract where one trading lot is ₹50 multiplied by the MCX iCOMDEX Bullion Index (₹16,135.62) and the contract value comes to ₹8.06 lakh and 5 per cent initial margin amounts to ₹40,339 — making it a stretch for small retail investors.

In commodity futures contracts, in addition to initial margin, extreme loss margin and MTM (market-to-market) margin to offset the loss, if any, in the contract at the end of each trading day is charged. It is calculated by marking all positions in the futures contract to the settlement price at the end of the day.

Further, exchanges may also charge other margins from time to time. If volatility in a contract increases, the exchanges will recalculate the margins and collect the additional money in T (trading day) +1 day.

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on August 30, 2020
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.