What is MCX?

The Indian economy has become reliant on capital markets. Without exchanges like the National Stock Exchange or the BSE, a flourishing capital market wouldn't have been possible. Before the invention of currency trade, commodities were used as a support system for trade. The origins of commodity trading probably predate any other type of trade. Modern commodity trade is facilitated by exchanges that allow trade in commodity derivatives. In 2017-18, India's major commodity exchanges logged trade volumes of more than Rs 60 lakh crore.

Although commodity exchanges are used to make millions of deals every day, their existence is not as well-known and widely known as stock exchanges. Low participation could be due to a lack of knowledge about commodity trading.Let's look at the many benefits of commodity trading.

Helps in diversification

Commodities are a powerful tool to diversify your portfolio. Commodities are generally less correlated than other asset classes like equities or bonds. Diversification is also possible because of the availability of many options. All commodities include sugar, corn, and soya, as well as gold, silver, and steel. When economic growth is slow or uncertain, equities are under pressure. However, the price of gold rises because of the shift of money to safer assets.

Hedging

Many investors use commodities to hedge their portfolios. Many industries use commodities like sugar, iron and maize as an input material. To protect themselves from price fluctuations, investors take a position opposite in the commodities futures markets. Certain events can be hedged with commodities. A crude oil price shock can have negative effects on the equity markets, but it will cause a rise in crude oil prices.

Protection against inflation

Commodities can be a great way to stay insulated in a country that has high inflation. Inflation can lead to a decline in the currency's value, which affects equity and bond values. The intrinsic value of commodities such as gold and silver is high enough that their value remains unaffected.

Liquidity

Many people associate commodity trading with the movement of large quantities of commodities. This could make it difficult to sell, if necessary. Trading on commodity exchanges is a completely different thing. Although one can also take physical delivery, most investors trade in commodity derivatives. You can liquidate derivatives just like any other financial asset like bonds or equity.

How do you trade?

Although the benefits of commodity trading are obvious, how can one trade in commodities. Commodity exchanges allow you to trade commodities safely without having to worry about counterparty risk. There are many Indian commodity exchanges. However, the Multi Commodity Exchange (MCX) is the most popular. This exchange allows for the clearing, settlement and trading of commodity futures in India. It was established by the Forward Markets Commission (FMC) in 2003. MCX is now regulated by SEBI after the merger of FMC and the Securities and Exchange Board of India.

There are many divisions within the MCX that can be used to conduct market activities, such as the clearing and settlement unit (clearing and settlement unit), delivery unit, trading and surveillance unit, clearing unit, clearing unit, and the warehousing logistics division. MCX allows you to trade commodities of all four major types: base metals, energy, and bullion. Trading in commodity futures has become easy and transparent thanks to the Multi Commodity Exchange. However, it is important that you are familiar with Indian factors that influence commodity prices.

Weather conditions

A majority of commodities traded on commodity exchanges are agricultural commodities. The price of a commodity is affected by weather conditions.

Political and economic conditions

The demand for commodities is directly affected by the performance of the wider economy. A strong economy will lead to a rise in commodity consumption and a higher price. Political events can also have an impact on commodity prices. A major mine closing can reduce the supply and cause a rise in the price of that commodity.

Government policies

The government has the ability to directly and indirectly affect commodity prices. The government has control over the production of many commodities, including coal, as well as procuring many commodities such wheat and rice. Prices can be affected by any change in production or procurement.

Conclusion

If you have the right strategy and use credible platforms such as MCX, trading commodities can be lucrative. Standardisation is a key factor in commodity exchanges. They also help investors understand the transaction better.