What is commodity trading?
Commodities can be classified into different categories like agro-commodities, gold, silver and metals, crude oil, natural gas, cooking oils, etc. All these products are traded in the commodity exchanges.
Commodity exchange in India has a nationwide presence and is mainly a system of electronic trading. Electronic trading allows retail investors to participate and trade in the commodities market by purchasing small quantities of commodities mentioned above and holding them in the electronic format.
Why invest in the commodities market?
Easy transaction: Since all transactions take place in the electronic format, you can buy and sell commodities in an easy and hassle-free manner.
Diversification: The price of commodities is inversely proportional to equities. Thus, commodities are a great way to hedge risk and are a good alternative to equity investments.
High liquidity: Commodities can be easily sold in times of need. Thus, these assets can be easily liquidated in times of need.
Margin finance: Invest only a portion of the cost of the commodity and take home huge profits, through margin financing.
What are the pre-requisites of trading?
- A bank account and a commodity trading account
- KYC details and PAN Card
- Commodity Demat account as it is mandatory for all delivery-based transactions.
- Sales Tax number (not mandatory for trading but for delivery-based transactions).
How to open a commodity trading account?
To open a commodity trading account, submit your identification and address proof along with a bank account statement, and a copy of the PAN Card which form a part of the KYC norms. The process of opening a commodity trading account is similar to opening a Demat account in the equity market.
You have to open your trading account with the NSEL (national spot exchange limited) and a Demat account with a depository like National securities depository limited.