The investment market in India is an exciting one for an investor looking to make profits. One can invest in multiple financial products such as equities, FDs, Mutual funds etc. However, there is an effective method used by knowledgeable investors to diversify their portfolios and increase their returns: Futures Trading. It is a great way for investors to hedge against price fluctuations and earn profits along the way.
Here’s everything about Futures Trading and how commodities make up for the bulk of the trading process.
What is a Futures Contract?
As the name suggests, a futures contract is an agreement to buy or sell an asset at a specific time in the future for a predetermined price. This lowers the risk against price fluctuations to get a proper price no matter the future price.
For example, imagine an Airline company anticipates its fuel demand to rise in the coming months. The company can then buy a futures contract for fuel at a predetermined price. This way, even if the price increases, they only have to pay the price determined while buying the contract. However, a fuel company may fear that the fuel prices may decline and sell a futures contract for fuel to the airline company for the agreed-upon price. Once both sides agree on a specific price, a futures contract becomes legal, deliverable in 2-3 months.
However, investors use a futures contract to make a profit. They buy a futures contract after researching, analysing and anticipating that the price of the asset they are buying will go up, and they will only have to pay the predetermined price. For example, if an investor buys a Futures Contract for Rs 10,000 and at the time of expiry, the price of the total commodity becomes Rs 15,000, the investor, by selling, earns a profit of Rs 5,000.
What Is Future Trading in Commodities?
Futures Trading for commodities is the process of buying a futures contract for commodities such as gold, oil, sugar, pulses, natural gas etc. You can trade in commodities futures through spot prices or future prices. Spot prices allow investors to pay for and receive the delivery of the commodity immediately, while future prices follow an expiry date and price at a specific point of time in the future.
How does Futures Trading in Commodities work?
Futures Trading for commodities works on the same principle of futures trading. You can buy a futures contract for any commodity, such as chana dal, natural gas, aluminium etc., for a pre-determined price and sell it before the expiry date. If the price of the commodity is higher than the price before the expiry date, you earn a profit; if not, you incur a loss.
Commodity trading in India is done through commodity exchanges managed under the umbrella of the Securities and Exchange Board of India (SEBI). The exchanges are Universal Commodity Exchange, National Commodity and Derivative Exchange (NCDEX), Multi Commodity Exchange of India (MCX) and National Multi Commodity Exchange of India.
How many commodities are permitted for Futures Trading?
Although there are hundreds of commodities you can trade in any of the exchanges; the most common permitted commodities are as follows:
Grains: Rice, Basmati rice, wheat, maize, jeera.
Oil and oilseeds: Castor seeds, soy seeds, castor oil, refined soy oil, soy meal, crude palm oil, groundnut oil, mustard seed, cottonseed, etc.
Spices: Pepper, red chilli, jeera, turmeric and cardamom.
Pulses: Chana, urad, yellow peas, tur dal.
|Metals and materials||
Base metals: Aluminum, copper, nickel, zinc, tin.
Bulk commodities: Iron ore, coking coal, bauxite, steel.
Others: Soda ash, chemicals, rare earth metals.
|Precious metals and materials||Gold, silver, platinum and palladium.|
|Energy||Crude oil, natural gas, Brent crude, thermal coal, alternate energy.|
|Services||Oil services, mining services and others.|
How to Invest in commodity futures?
First, you need to select a stockbroker to open a commodities trading account. 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 etc. 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 trade commodity spot prices through the following process:
- Open a commodity trading account with IIFL through the mobile app or IIFL’s website.
- Choose an exchange and the asset with the commodity market you want to trade.
- You can start trading your preferred commodities futures contracts once your account is active.
Strategies for Commodity Futures Trading
Commodities trading can be risky and needs constant revisions on technical factors to ensure that you don’t lose your invested capital. Here are some strategies you can follow for commodity futures trading:
Niche Commodity Market: Every commodity futures trader has its own niche commodity where they feel confident. You can try your hands on various commodities to choose what is best suited for you and stick to trading the same commodity’s future contracts.
Follow the Trend: Once you know your niche commodity, you can make profits by following commodity trends. As the prices are determined through demand and supply factors, you can closely watch the affecting factors and follow the price.
Analyse the fundamentals: You can monitor and analyse the fundamentals and technical factors that can affect the price of the commodity. For example, a weaker monsoon may indicate that the prices of agriculture-related commodities may go up, and you can make a profit by trading in the commodities futures contract.
Commodity Futures trading can prove to be a great way for investors with a high-risk potential. The process can give high returns on the investments if the decisions are backed by a good strategy and extensive research. Consult with your stockbroker and its advisors to learn about what is futures trading in commodities and get research and analysis support. You can start monitoring daily financial newspapers that carry news about most commodities. Furthermore, there are specialised magazines on agricultural commodities and metals available for subscription.