What is Commodity Trading? Complete Beginner’s Guide India 2025

Introduction

If you've ever wondered what is commodity trading, this guide is for you. Commodity trading is a global market activity where participants buy and sell raw goods (like gold, crude oil, wheat) or contracts based on these goods. Unlike stocks, commodity markets are heavily influenced by supply-demand events — weather, geopolitics, seasonality — making them attractive for diversifying a portfolio and for hedging business risk. In India, commodity trading has matured with regulated exchanges, better price discovery, and robust settlement mechanisms.

What is Commodity Trading & How It Works

Put simply, commodity trading involves speculating or hedging on the price of physical goods. Trading can happen in two main ways:

1. Spot / physical trading: Buying or selling the physical commodity for immediate delivery (less common for retail participants).
2. Derivatives trading: Using futures (and sometimes options) contracts to gain exposure without handling the physical goods. Most retail and institutional participants use futures contracts listed on exchanges such as MCX (Multi Commodity Exchange) and NCDEX in India.

A futures contract obliges the buyer to purchase (and the seller to deliver) the commodity at a predetermined price on a specified future date — though in practice most contracts are squared off or rolled over before delivery.

Commodity Exchanges & Regulation in India

Commodity trading in India primarily occurs on regulated exchanges: MCX for most commodities and NCDEX for agricultural products. These exchanges standardize contracts (lot size, expiry, tick size) and provide clearinghouses to manage counterparty risk. Regulation by SEBI has strengthened market integrity since commodity market reforms: margin systems, disclosure standards, and surveillance have greatly improved.

For official information check MCX and SEBI pages for contract specifications and rules. (MCX, SEBI).

Types of Commodities Traded

Commodities are broadly grouped into:

• Metals: Gold, Silver, Copper, Aluminium — often used for hedging and safe-haven plays.
• Energy: Crude Oil, Natural Gas — highly sensitive to geopolitics and macro demand.
• Agriculture: Wheat, Soybean, Cotton, Sugar — seasonal and weather-dependent.
• Precious metals: Often traded as bullion; used by investors for inflation protection.

Commodity Trading vs Stock Trading

Both markets have pros and cons — commodity trading is excellent for hedgers and traders who understand macro factors, while stock trading suits those focused on company-level analysis.

Benefits of Commodity Trading

Commodity trading offers several advantages:

• Diversification: Commodities often have low correlation with equities and bonds.
• Hedging: Producers (farmers, miners) and consumers (manufacturers) hedge price risk using futures.
• Inflation protection: Physical assets like metals can preserve purchasing power.
• High liquidity in major contracts: Popular contracts (gold, crude) attract large volumes and tight spreads.

Risks in Commodity Trading

Commodity trading is not risk-free. Key risks include:

• Volatility: Prices can swing rapidly on supply shocks or political events.
• Leverage risk: Futures require margin — small moves can cause large gains or losses.
• Liquidity risk: Some commodity contracts or expiries may be illiquid.
• Operational risk: Delivery obligations if contracts are held to expiry (retail traders usually avoid delivery).

Strong risk management and position sizing are essential when trading commodities.

How to Start Commodity Trading in India (Step-by-step)

1. Open a trading & commodity account with a SEBI-registered broker offering MCX/NCDEX access.
2. Complete KYC and enable commodity & derivatives segments.
3. Fund your account and understand margin rules for chosen contracts.
4. Choose liquid contracts (gold, crude, lead) and learn contract specifications (lot size, tick value, expiry).
5. Practice with small sizes or demo platforms; use stop-loss and risk limits.
6. Monitor macro calendars — weather reports, inventory data, and geopolitical news move commodity prices.

For contract specs always refer to the exchange pages (MCX) and regulatory updates from SEBI. (See: MCX, SEBI.)

Popular Commodity Trading Strategies

1. Trend Following

Ride sustained moves using moving averages, breakouts, and momentum. Best for liquid contracts like crude and gold.

2. Spread Trading (Calendar/Inter-Commodity)

Buy one contract and sell another (different expiry or related commodity). Spreads reduce outright volatility and are popular among professional traders.

3. Arbitrage

Exploit price differences between exchanges or between spot and futures. Requires speed and low transaction costs.

4. Hedging

Producers or consumers lock in prices using futures to reduce business risk — the classical use of commodity markets.

5. Options strategies

Use commodity options (where available) for defined-risk plays and volatility trades.

Examples: Gold & Crude Oil

Example 1 — Gold: If a jeweler expects prices to rise, they may buy futures to hedge. Example 2 — Crude: Geopolitical tensions can spike crude futures; traders use trend-follow or spread trades to capture moves.

How Trading Shastra Teaches Commodity Trading

At Trading Shastra Academy we teach commodity trading with a practical, risk-first approach. Our commodity modules cover contract specs, spread trading, and hedging workshops with live market drills. Students get internship-style practice and certification — progressing from demo to funded practice accounts for qualified candidates. If you want hands-on commodity training, our programs combine strategy, psychology, and position sizing that matter in real markets.

Internal resource: Explore related courses.

Frequently Asked Questions