The Indian commodity market, though not as popular as the stock market, is currently experiencing significant growth. Similar to the stock market, the commodity market also has dedicated exchanges. These exchanges play a crucial role in price determination and have a substantial impact on the primary sector of the Indian economy.
One name that prominently stands out in the Indian Commodity Market is MCX, or the Multi Commodity Exchange of India Ltd. MCX plays a pivotal role in the country’s financial landscape, contributing to the trading and investing in a wide array of commodities.
In this article, we’ll delve into what MCX is, its significance, and how it functions in India’s financial ecosystem.
What is MCX?
MCX stands for Multi Commodity Exchange of India Ltd. The Multi Commodity Exchange, based in Mumbai, was founded in November 2003. Initially, its regulatory oversight was provided by the Forward Markets Commission (FMC). However, in 2016, regulatory authority over MCX shifted to the Securities and Exchange Board of India (SEBI) as FMC merged with SEBI.
This exchange serves as a digital platform that enables commodity traders to engage in online trading, as well as the clearing and settlement of transactions involving commodity futures. In essence, MCX provides a convenient and efficient platform for traders to engage in hedging activities.
Commodities Traded on MCX
The MCX (Multi Commodity Exchange of India) commands a substantial 60% market share in India’s commodity futures trading. It offers futures contracts across various categories:
- Agricultural Products: Includes Rice, Wheat, Soybean Oil, Soybean Meal, Cotton, Natural Gas, Crude Oil, and Gold.
- Metals: Covers Aluminum, Copper, and Nickel.
- Energy: Offers futures in Crude Oil and Natural Gas.
- Currencies: Provides trading in South African Rand, Brazilian Real, and Mexican Peso.
- Softs: Includes Coffee and Sugar.
MCX is a vital platform for diverse trading opportunities in India’s commodity markets.
Factors Affecting Commodity Prices on MCX
Commodity prices on MCX (Multi Commodity Exchange) are influenced by several key factors:
- Supply and Demand: The most fundamental factor affecting commodity prices is the balance between supply and demand. Variations in demand and supply are influenced by a range of factors, including seasonal fluctuations, domestic economic conditions, and global market dynamics. When demand surpasses supply, prices tend to rise, and vice versa.
- Geopolitical Factors: Geopolitical events and conditions can have a significant impact on commodity prices. For instance, political instability in major commodity-producing regions can disrupt supply chains and lead to price volatility. Additionally, trade tensions, embargoes, and sanctions can affect the global flow of commodities, influencing their prices in both positive and negative ways.
- Cost Structures: The cost of production is a crucial determinant of commodity prices. This cost includes expenses related to research and development, procurement of raw materials, labour wages, taxes, and other operational costs. Fluctuations in these cost components can directly affect the pricing of commodities.
- Technological Advancements: Technological innovation plays a pivotal role in shaping commodity prices. Improved technologies can enhance production efficiency, leading to increased yields and lower marginal costs. As technology advances, it can potentially boost supply and reduce production expenses, thereby affecting the price of commodities.
Features of Commodity Trading on MCX
- Helps in diversification
Commodities can be a potent tool for diversifying your portfolio. Commodities generally have a low or negative correlation to other asset classes such as equities and bonds. The availability of a wide variety of options also helps in achieving diversification. Commodities include everything from sugar, soya and corn to gold, silver and steel. For instance, when economic growth is uncertain, equities come under pressure, but the price of gold rises due to the movement of money towards safe assets.
A large number of investors use commodities for hedging. Commodities like sugar, iron, maize or copper are major input materials for a large number of industries. Investors take an opposing position in the commodities futures market to protect against price fluctuations. You can also hedge against certain events through commodities. An oil shock may be negative for the equity markets but will lead to a surge in prices of crude oil.
- Protection from inflation
In a country with high inflation, commodities can help you remain insulated. Inflation leads to the erosion in the value of the currency and hence affects the value of equity and bond holdings. However, the value of commodities like gold and silver remains intact as they have high intrinsic value.
Many people equate commodity trading with the actual movement of a large quantity of commodities, which could be difficult to sell if required. However, trading through commodity exchanges is completely different. While one can take physical delivery also, investors generally trade in commodity derivatives. Derivatives can easily be liquidated just like other financial assets like equity and bonds.
Advantages of MCX
- Transparency: Transparency is a key feature of the MCX commodity, as it provides a well-structured and organised platform where trading volumes, prices, and changes are completely transparent. This transparency allows traders to make informed choices based on accurate information.
- Range of Opportunities: The MCX also offers a wide range of opportunities through its various monthly contracts of derivatives and options. These opportunities provide traders with much-needed diversification and liquidity, which can help mitigate risk and increase profitability.
How To Trade on MCX?
Trading on MCX (Multi Commodity Exchange) involves buying and selling various commodities. Here are the basic steps to get started with commodity trading on MCX:
- Open a Trading Account: Choose a reputable brokerage firm that offers MCX trading services. Contact the chosen broker to open a commodity trading account. Provide the required documents, including identity and address proofs, as well as your PAN card.
- Complete KYC Formalities: Complete the Know Your Customer (KYC) process, which includes submitting your Aadhaar card and a passport-sized photograph. The broker will verify your documents and activate your trading account.
- Fund Your Account: Deposit funds into your trading account to start trading. The amount you deposit should cover your trading capital and margin requirements. You can transfer funds electronically from your bank account to your trading account.
- Start Trading: Log in to your trading account provided by your broker. Select the commodity you want to trade and place buy or sell orders. You can specify the quantity, price, and other relevant details. Monitor the market, and when your order is executed, you will have bought or sold the chosen commodity.
Factors Affecting Commodity Trading
- Weather conditions
The bulk of commodities traded through commodity exchanges are agricultural commodities. Weather conditions have a significant impact on the production of agricultural goods, affecting the price of the commodity.
- Economic and political conditions
The performance of the broader economy has a direct bearing on the demand for commodities. If the economy is robust, the consumption of commodities rises and also the price. Along with economic conditions, political events also impact commodity prices. For instance, the closure of a major mine can curtail the supply of a specific commodity and lead to a rise in prices.
- Government policies
The government can directly as well as indirectly influence commodity prices. The government controls the production of several commodities like coal and also procures many commodities like wheat and rice. Any change in the procurement or production pattern can have a substantial impact on the prices.
Trading in commodities can be rewarding if done with the right strategy and through credible platforms like MCX. Commodity exchanges also ensure standardisation and help the investors get a better idea of the transaction. In case you are looking to start your commodity trading journey, open your demat account with Angel One today and start now!
What is MCX?
MCX stands for Multi Commodity Exchange of India Ltd. MCX is the first listed electronic commodity derivatives exchange in India that operates at a national level.
How does MCX work?
MCX works by providing a platform for buyers and sellers to trade commodities online. Buyers can place bids, and sellers can offer asking prices for various commodities, and the exchange matches these orders based on price and time priority.
Who can trade on MCX?
Anyone who meets the eligibility criteria set by MCX can trade on the platform. Individuals, companies, and institutions can all participate in commodity trading through MCX.
How to Buy MCX Share?
You can buy MCX Share through any brokerage firm it is listed on by creating a demat account and getting your KYC done.