What is Commodity Trading in Zerodha? | How Does Commodity Trading Works?
In 2022, I thought of introducing you all not so popular Commodity Trading. I’m planning to explain this in little detail about commodities, What is commodity trading in Zerodha, the types of commodity trading available in India, How it works, and lastly the steps in Zerodha for doing commodity Trading.
Let’s pick each point one by one so that it becomes easier for my end-users to understand every bit of it.
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What does Commodities and Commodity Trading means?
Commodities are products or goods that we use in our daily lives and are tradeable. In other words, a commodity is any raw material or primary agricultural produce that can be easily brought and sold be it wheat, rice, crude oil, soya bean, coal, gold, or silver. In India, traders deals in four types of commodities:
Agricultural Products: Wheat, Rice, Soya Bean, Chana, Rubber, etc
Metal: Copper, Iron, Aluminium, Gold or silver, etc
Energy Product: Crude oil, natural gas, coal, gasoline, etc
Livestock: Meat, Egg, cattle, etc.
Commodity Trading is buying or selling commodities and plays a crucial role in the Indian economy.
Well, commodity trading is not new to India but could not make strong footprints due to poor government policies, fragmented markets, and foreign invasions. However, in 2003 regulated platforms like MCX or NCDEX came into the picture and gave a push to commodity trading. Above all, Commodity trading is one such way to diversify your asset portfolio and spread your risk to a large basket of securities. Thus, commodity trading provides an excellent opportunity to all investors to explore new asset classes.
Commodity Trading helps in enhancing investment in the agricultural sector. Therefore, these investments can lead to better warehousing and transportation facilities. Secondly, it helps in price discovery and hedging price risk to safeguard the investors.
How Does Commodity Trading Works?
Commodity trading functions on demand and supply. The demand of the product is directly proportional to its price and supply is inversely proportional to its price. Apart from demand & supply, government policies, geopolitical tensions, factors of production and the global economy also play role in deciding the price of the commodity. Let’s there, one year rain didn’t happen as per expectation which affects the supply of wheat then it will lead to a rise in the price of a wheat commodity.
In India, commodity trading is done through derivative contracts such as commodity futures, options, and spots.
In the case of spot contracts, trading and settlement of commodities happen in instant. Whereas Commodity futures are supposed to trade at standardized future prices. In futures contracts, the buyer has the right and is under obligation to buy the commodity at the pre-determined rate in futures. In addition, the same obligation applies to the seller as well.
On the other hand, under an option contract, the buyer has the right but no obligation to buy the commodity at a pre-determined price in the future.
It is done usually in a lot such as barrels of oil, kgs of wheat/rice, bushels of corn, etc. Once the contract is about to expire, then either you can take physical delivery of the product or settle in cash as per the terms agreed in the contract.
Secondly, you can book profits due to price fluctuations in commodities without having directly invested in futures or other derivatives through ETFs or exchange-traded notes.
Steps of Commodity Trading in Zerodha
Time needed: 5 minutes.
We are at the final stage of our article to understand how we can execute commodity trading in Zerodha. Please find the steps for trading in commodities in Zerodha:
- Open the Zerodha Kite app or webpage on your mobile/desktop.
If you already have the Zerodha Kite app installed on your device, just key in your credentials and log in.
- Activate Your Commodity Segment
Once you log in and you’re going to trade in commodities for the first time. If not activated the commodity segment at the time of account opening then please activate under the profile section in the segment option.
- Add funds to Commodity Segment
In case you already have funds in the Equity segment then you can’t utilize the same for commodity trading. Instead, you need to add funds separately in this section. Go to profile and choose funds. After that, click on add funds.
- Search for the Commodity you like to Invest
On the universal search tab, search for the commodity you like to invest. For instance, you like to buy Silver so choose Silver MCX from the Search bar tab.
- Click on BUY Option and Choose the required buying preference:
Firstly, enter the no. of the quantity you like to buy. Secondly, choose you to want to intraday trading or normal one. In case intraday choose MIS or if you want to hold for future choose NRML. Choose the price at which you like to buy in case of limited orders. Further, choose Regular and Day.
- Click on Swipe to Buy
After selecting your buying preference, click on swipe to buy. Just by a single swipe, your order will be placed successfully. The window for commodity trading is 9 am to 11:30 pm.
Now we can make out commodity trading is not a cup of tea for everyone instead it’s suitable for sophisticated investors. Before you start trading ensure you understand the commodity price trend and other forms of research. To trade in the commodity market, you need to have high-risk tolerance as the market is quite volatile. You can trade in a small portion of your total portfolio to diversify the risk.