How Commodity Market Works in India: A Beginner’s Guide 2025

India, with its diverse economic structure and reliance on agriculture and natural resources, has a robust commodity market. As someone interested in the financial world or looking to make a profit through trading, understanding how the commodity market works is essential. This guide walks you through how commodity trading works, how commodity prices are determined, and much more.

What Is the Commodity Market?

A commodity market is a place where raw materials or primary products are bought and sold. These materials, known as commodities, are essential goods that can be exchanged for other goods of the same type. In India, commodity trading mainly occurs through two exchanges:

1. Multi Commodity Exchange (MCX)

2. National Commodity and Derivatives Exchange (NCDEX)

Both of these exchanges play an essential role in how commodity trading works and how commodity prices are determined.

How Commodity Market Works in India?

India’s commodity market operates much like the stock market, except that instead of stocks, commodities such as gold, silver, crude oil, and agricultural products like wheat or soybeans are traded. Here’s a step-by-step breakdown of how the commodity market works:

1. Buyers and Sellers: The commodity market involves two major players—buyers and sellers of commodities. Buyers could be businesses that need raw materials for production, while sellers are producers of those raw materials.

2. Commodity Exchanges: All trades take place on regulated exchanges like MCX or NCDEX. These exchanges facilitate trading, ensure fair pricing, and eliminate counterparty risk.

3. Trading Mechanisms: Commodities are traded either through spot markets, where the actual physical goods are exchanged, or futures contracts, where the trade happens for a future date.

4. Commodity Brokers: To start commodity trading, you will need a broker. Commodity brokers help traders access the market and execute buy/sell orders on their behalf.

5. Commodity Pricing: Commodity prices in India are influenced by a wide range of factors, including demand-supply dynamics, global market trends, geopolitical conditions, and currency fluctuations.

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How Commodity Trading Works?

Commodity trading involves the buying and selling of commodity contracts. There are two main types of commodity contracts:

1. Spot Contracts: In this type of contract, the buyer purchases the actual commodity (such as gold or crude oil) and takes delivery immediately.

2. Futures Contracts: In futures contracts, the buyer agrees to purchase a commodity at a future date for a pre-agreed price. Futures trading allows traders to hedge against price fluctuations or speculate on the movement of commodity prices.

For example, if you expect the price of gold to increase, you can buy a futures contract today and sell it later at a higher price, thus making a profit.

How Commodity Prices Are Determined?

Commodity prices are not set arbitrarily. They are driven by market forces such as:

1. Supply and Demand: The fundamental driver of commodity prices is the balance between supply and demand.

For example, if there’s a surplus in crude oil production but limited demand, the price will fall.

2. Global Market Trends: Commodity prices in India are influenced by global events.

For instance, a war in an oil-producing country can cause crude oil prices to surge.

3. Government Policies and Tariffs: Government interventions, taxes, and subsidies also play a critical role in determining commodity prices.

4. Weather Conditions: For agricultural commodities like wheat, sugar, and rice, weather conditions directly affect production levels and thus the price. Poor monsoons can cause a drop in supply, leading to price hikes.

5. Currency Fluctuations: Since most commodities are traded in international markets, the value of the Indian Rupee against the US Dollar can also affect the price of commodities.

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How Commodity Exchanges Work?

In India, the MCX and NCDEX function as the backbone of commodity trading. These exchanges provide a transparent platform for trading, price discovery, and risk management.

Here’s a breakdown of how commodity exchanges work:

1. Regulation: Commodity exchanges in India are regulated by the Securities and Exchange Board of India (SEBI). SEBI ensures transparency, minimizes fraudulent practices, and protects the interests of all market participants.

2. Trading Platforms: Both MCX and NCDEX offer electronic trading platforms where traders can buy and sell commodities.

3. Clearing Houses: To avoid counterparty risk (the risk that one party fails to fulfil its contract), exchanges have clearing houses that ensure the successful settlement of all trades.

4. Price Discovery: Commodity exchanges help in discovering the price of commodities through the interaction of buyers and sellers in the market. This is one of the reasons why the exchangebased price often acts as a benchmark for the physical market.

How Commodity Futures Work?

Commodity futures are standardized contracts to buy or sell a commodity at a specific future date for a price agreed upon today. Traders use futures for two primary purposes:

1. Hedging: Companies that deal with commodities use futures to hedge their price risk.

For example, an airline might buy crude oil futures to lock in a specific price for fuel and avoid price spikes in the future.

2. Speculation: Traders who want to profit from price movements without taking possession of the physical commodity use futures for speculation.

For instance, if you expect the price of gold to rise, you can buy a gold futures contract and sell it later at a higher price.

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How Commodity Hedging Works?

Hedging in the commodity market involves taking a position in a futures market to offset the risk of price fluctuations in the physical market. Here’s how commodity hedging works:

1. Example of a Farmer: Let’s say a farmer expects a good harvest but is worried that the price of wheat might drop by the time the crop is ready for sale. The farmer can hedge by selling wheat futures today at a locked-in price, ensuring a predictable income.

2. Example of a Manufacturer: Similarly, a manufacturer who needs raw materials like copper might buy copper futures to lock in today’s price and avoid paying more if copper prices surge.

How Do Commodity Markets Make Money?

There are several ways to make money in the commodity market:

1. Speculation: By speculating on future price movements, traders can buy low and sell high or sell high and buy low to make a profit.

2. Arbitrage: Some traders take advantage of price variation between different markets to earn a profit, buying in one market and selling in another at a higher price.

3. Hedging: While hedging is primarily for reducing risk, it can indirectly lead to profit if market conditions change favourably for the hedger.

Is Commodity Trading Legal in India?

Yes, commodity trading is entirely legal in India. The market is regulated by SEBI, which ensures the integrity and transparency of trading activities. However, to trade in commodities, you must open a trading account with a SEBI-registered broker.

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How to Start Commodity Trading?

Here’s a step-by-step guide on how to start commodity trading:

1. Choose a Broker: Select a SEBI-registered commodity broker that offers access to MCX or NCDEX.

2. Open a Trading Account: You will need to open a commodity trading account with the broker.

3. Fund Your Account: Deposit the required margin money into your account. Each commodity has a specific margin requirement (the minimum capital needed to start trading).

4. Start Trading: Once your account is set up and funded, you can begin buying and selling commodity contracts.

Is Trading Commodities Profitable?

Trading commodities can be profitable, but it comes with significant risk. Factors like volatility, leverage, and market fluctuations can lead to both significant gains and losses. Success in commodity trading depends on market knowledge, timing, and effective risk management.

Which Commodity Is Best for Trading?

The “best” commodity for trading depends on your risk appetite and market knowledge. Some of the most traded commodities in India include:

1. Gold and Silver: These are popular among traders for their stability and long-term value.

2. Crude Oil: Crude oil trading is highly volatile, making it suitable for traders looking for short-term gains.

3. Agricultural Commodities: Commodities like wheat, soybeans, and sugar are also widely traded, especially by those familiar with the agricultural sector.

How Many Units Is 1 Lot of Gold?

On MCX, 1 lot of gold equals 1 kilogram. Traders can trade in multiple lots depending on their capital and risk appetite.

How to Calculate MCX Margin?

MCX margin is the amount of money you need to have in your account to initiate a trade. The margin percentage varies by commodity and fluctuates based on market volatility.

For instance, the margin for gold might be around 5%, meaning if gold is trading at ₹50,000 per 10 grams, you need to have ₹2,500 in your account to trade 1 lot.

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How Commodity Market Works for Beginners?

For beginners, it’s essential to start small and gain knowledge about the market. Here’s what you should do:

1. Learn the Basics: Understand how commodities are priced and the difference between spot and futures contracts.

2. Choose a Commodity: Focus on one or two commodities that you understand well.

3. Start with Small Trades: Don’t invest large amounts initially. Start small and increase your exposure as you gain experience.

4. Use Demo Accounts: Some brokers offer demo accounts where you can practice trading without risking real money.

What Are the 3 Types of Commodities?

The three primary types of commodities are:

1. Agricultural Commodities: Such as wheat, corn, and sugar.

2. Energy Commodities: Such as crude oil, natural gas, and coal.

3. Metal Commodities: Such as gold, silver, and copper.

Closing Note of Commodity Market:

In conclusion, the commodity market in India offers numerous opportunities for traders and businesses to profit or hedge against risk. Understanding how commodity trading works, how commodity prices are determined, and how to start trading is crucial before diving into this dynamic market. While the profit potential is significant, remember that risk management and informed decision-making are key to long-term success.

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Disclaimer:

All the information in the blog is for educational purposes only. I am not a SEBI registered advisor, Please consult with a qualified financial planner or do your own research before making any investment.

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