What is MCX?

The Indian financial market is entirely influenced by the demand and supply forces prevailing in the economy. As demand and supply are always changing, price fluctuation for assets relies on these forces to derive their value. Investors who are looking to make profits scan the Indian financial market to identify such assets. For some investors, the search ends at equities, and for some, it ends at bonds. However, investors with a higher risk appetite end their search with commodities

As the prices of commodities such as pulses, spices, metals, etc., are always fluctuating, investors prefer to buy these commodities when their prices are low and sell at a higher price. Furthermore, manufacturers, too, look towards commodity trading to hedge against price fluctuations and mitigate their losses if the prices suddenly fall.

If you are intrigued by the idea of commodity trading and how it can multiply your profits along with portfolio diversification, this blog details everything about commodity trading and its most important exchange: The MCX.

What are commodities?

Commodities are an asset class that resonates with items of everyday life. For example, petrol, natural gas, chana dal, urad dal, iron, gold, silver, etc. They are mainly categorized as movable goods that anyone can purchase or sell, except for actionable claims or money. As the prices of commodities are always changing, investors use them as an asset class to profit from the difference between their buying and selling prices.

What is commodity trading?

Commodities refer to movable goods that we use daily, ranging from grains, cotton, fuel, sugar to metals such as gold, copper, zinc, etc. Commodities are raw material inputs that are used to prepare a variety of finished goods. Therefore, commodities are tangible goods, or physical goods, which can be purchased and traded.

How does commodity trading work?

Commodity prices are a function of demand and supply. The demand for a commodity is directly proportional to its price, and its supply is inversely proportional to its price. The pricing of a commodity also fluctuates based on government policies, geopolitical tensions, global economy, factors of production, etc. For instance, reduced rainfall in the country may affect the cotton supply and increase the global price of cotton in that year. Similarly, the advent of electric vehicles may impact the demand for fuel and result in a price reduction.

Types of commodities

Although there are hundreds of commodities to trade at any of the exchanges; the most common types of commodities are as follows:

How can one trade in commodities?

There are two major ways through which commodity traders can trade:

Futures Contract: A commodity futures contract is an agreement between the buyer and the seller of the commodity. The buyers agree to purchase a specific quantity of a commodity at a predetermined price and a predetermined future date. Every futures contract comes with an expiry date and can result in profit or loss for the buyer based on the current market price of the commodities.

Options Contract: An options trading contract is generally permitted in top commodities wherein the trader has the right but not a legal obligation to buy/sell the commodity at a fixed price. The buyer may let go of the contract if the current prices of the commodities are low which may result in a loss. Such a contract helps investors to make a profit based on price fluctuations without actually having to buy/sell commodities.

Where to invest in commodities?

You can trade commodities in the following exchanges:

1. National Commodity and Derivatives Exchange – NCDEX
2. Multi Commodity Exchange – MCX
3. National Multi Commodity Exchange – NMC
4. Ace Derivatives Exchange – ACE
5. Indian Commodity Exchange – ICEX
6. The Universal Commodity Exchange – UCX

However, MCX is one of the most important and biggest exchanges to trade commodities among the above exchanges. Most investors who are active in the commodities market tend to choose MCX as their preferred commodity exchange.

What is MCX?

MCX or the Multi Commodity Exchange of India Ltd is a commodity exchange started by the Government of India in 2003. It is India’s biggest derivatives exchange, where commodities are traded in futures and options. In 2019-20, the total volume of commodity futures contracts rose to ₹32,424 crores, a rise of 26% than the year 2018-19.

Before 2015, the Multi Commodity Exchange of India Ltd was regulated by the Forward Markets Commission (FMC). However, the FMC was merged with the Securities and Exchange Board of India in 2015 making the MCX come under the regulation of SEBI.

Commodities that are traded in the MCX are as follows:

• Metal -Copper, Aluminium, Lead, Zinc, Nickel.
• Bullion - Gold, Gold Guinea, Gold Mini, Gold Petal, Gold Global, Gold Petal ( New Delhi), Silver, Silver Mini, Silver 1000, Silver Micro.
• Agro Commodities - Cotton, Crude Palm Oil, Cardamom, Kapas, Castor seed, RBD Palm Olein, Mentha Oil, Black Pepper.
• Energy - Crude Oil, Natural Gas.

How to invest in commodities?

Now that you know what MCX is, you know where the commodities are traded. However, to invest in commodities, a Demat and trading account are compulsory. You can open a free Demat cum trading account with IIFL in simple and quick steps.

IIFL is one of the leading players in the broking space in India and offers broking services in various categories of equity, commodities, currency, derivatives, and so on. These services are supported by a strong in-house research team and an excellent customer support system. Trader Terminal, the proprietary trading terminal of IIFL, offers the convenience of trading in commodities by providing flexibility of access through desktop applications as well as a browser-based web application.

You can open a commodity Demat and trading account with IIFL by following the below steps:

Step 1: Apply for a Demat account online.
Place your account opening request to IIFL by submitting your name & number in the Lead form. You can find the lead form at the ‘Open Demat account’ option on IIFL’s website or the IIFL Markets application.

Step 2: Submit the KYC details.
After filling out the lead form, you must submit your KYC details online. This includes submitting the duly filled application form along with the copies of required identity proofs.

Step 3: Documents Verification
Once the application form is submitted along with the KYC documents, an IIFL executive will call you to verify the KYC’s authenticity.

Step 4: Acquire the Beneficiary Owner Identity (BOID)
Upon processing the application at the DP, a unique Beneficiary Owner Identity, commonly known as BOID, is generated. You will receive an intimation of the opening of the commodity Demat and trading account with IIFL.

As the MCX is one of the biggest commodity exchanges in India, it is a surety that you will be trading commodities on the MCX sooner or later. However, it is always wise to first understand what factors can affect the commodity prices along with the detailed process of commodity trading. Read IIFL’s blogs to learn about commodity trading and be a professional commodity trader.