Multi Commodity Exchange or MCX – Meaning, Reasons to Trade & more
Know everything about MCX or Multi Commodity Exchange. MCX is one of largest commodity exchange in India.
Lets have a detailed understanding here.
Know About MCX or Multi Commodity Exchange
In the past few decades, the equity market has gained a lot of recognition among the traders. However, very few of them are aware of the commodity market.
Just like NSE and BSE in the equity market, the commodity market has its own indices. The multi-commodity exchange is one of the most popular commodity exchanges in India, with a daily trade volume of approximately $190 million dollars or 1395 crore rupees.
If you are a professional and experienced trader, you would already know the importance of commodity trading.
A wise man once said, “Don’t put all your eggs in one basket.” Commodity trading is the perfect tool for implementing this strategy.
The common mistake most investors make is they trade only in equity and not commodities. Due to this, all their investments go into losses if the equity market slides.
On the other hand, a trader who invests in both equity and commodity is in a position to hedge himself if one of the two markets slide.
If we put in simple words, MCX is the backbone of commodity trading in India. This is because the Multi Commodity Exchange is India’s largest exchange dealing in commodities such as Gold, Silver, Lead, Zinc, Aluminum, Nickel, Crude Oil, natural gas, etc.
MCX was established in the year 2003 in Mumbai, the city which holds the headquarters of MCX now.
Till 2015, the MCX was regulated by a designated body known as the Forward Markets Commission (FMC). However, the authorities decided to merge FMC with SEBI.
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Why trade in MCX?
Here are various reasons to Trade in Multi Commodity Exchange:
Diversification: As we stated earlier, trading and investing in commodities is crucial if you build a portfolio. This is because equity and commodity are two different markets that are not interrelated.
So, investing in both the market helps you ensure that your investments are safe in the other market even if a market falls.
For instance, the economic growth and prices of gold are negatively correlated. So, if the equity market suffers a dip due to the falling economy, your gold investment will rise simultaneously.
Liquidity: With the changing pattern of trading practices, the commodity market has also evolved.
Earlier, people believed that while trading in the commodity market, they will have to take the actual delivery of a commodity.
However, after introducing derivatives in the commodity market, a major portion of traders have shifted towards derivatives.
Due to this, their investments are more liquid as derivatives can be liquidated easily, just like in equity and bonds.
Insulation from Inflation: Inflation is inevitable, especially in countries like India, where the inflation rate was reported to be 5.5% in 2019.
This rapidly growing inflation tends to affect the value of currency adversely, further affecting the value of instruments like bonds.
Bullions like gold and silver provide you insulation from inflation. Since their intrinsic value is extremely high, their prices are rarely affected by inflation.
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Things to remember while Trading in MCX
Here are few things to keep in mind while trading in commodity via MCX.
Patience is the key:
Patience is one of the most important factors while taking a trade in any market. However, it becomes even more crucial in the case of the commodity market.
This is because you can invest an amount as small as Rs.10 in equity, which is not the case with commodity markets.
Therefore, when the money at stake is high, one must always be patient.
Never invest everything into a single commodity:
The quote, don’t put all your eggs in one basket, is applicable here. You can think of it on a micro-level.
This is because even though the commodity segment is different from equity, not all the commodities are the same.
Therefore, it becomes important to hedge yourself in the commodity markets as well. To do this, make sure you invest in different commodities in different sectors.
The commodity market is not the same as the stock market
Traders generally believe that if they can trade in one market, they can trade in others too. However, you must note that the stock market and commodity market are different.
Their timings are different; their instruments are different; therefore, the strategies must also be different.
Before implementing a successful stock market strategy in the commodity market, make sure you backtest it.
Although one strategy remains the same in all markets, trust your analysis. While trading in different markets, you get to hear different rumors about various products.
It is important to understand that making decisions based on these rumors is gambling, not trading.
So always do a thorough analysis, and before making a decision based on such rumors, try gaining some factual information about the same.
Invest slowly to learn and evolve
Every trader loses money during his initial trading days. However, one should always try learning from their losses and try converting them into profits. If you are a beginner stepping your foot into the commodity market, invest slowly.
Investing a major chunk of money is not advisable if you are a beginner. This is because if you lose, you lose it all. So, start slow and always try learning from your losses.
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Types of commodities traded in the MCX
Bullion: The term bullion refers to all the precious metals available for trading in the commodity market. In the case of MCX, there are gold and silver.
Base Metals: As the name suggests, the metals, corrosion, and oxidization are called base metals.
Though there are numerous base metals present on earth, not all of them are available for trading. The base metals available in the MCX market are aluminum, copper, lead, nickel, and zinc.
Energy: Energy is one of the most important segments in the commodity markets. The trade volume in the energy segment is quite significant.
The two commodities available for trading in this segment are natural gas and crude oil. As per the reports, crude oil and natural gas constitute more than 50% of the entire energy products traded in the markets.
Agriculture: The sector responsible for a major chunk of the country’s employment has its value in the commodity market.
Apart from employing 40% of the country’s population, the sector performs a major role in India’s GDP as well.
The major agricultural commodities available for trading in MCX are Black Pepper, Crude Palm Oil, Cotton, Cardamom, Mentha Oil, etc.
Types of margins in the Multi Commodity Exchange
Initial margin: While trading in the MCX market, most traders trade in derivatives, i.e., futures and options. So, if you are trading in futures of a commodity, you need to pay an upfront amount.
The amount you need to have does not resemble the total amount of the contract. Instead, it represents only a portion of the contract value.
This portion that you need to have in your account is known as Initial Margin.
M2M margin: The completion of trade requires steps, i.e., buying and selling. After executing a trade, the profit and loss are represented by a term known as Mark-to-Market(M2M).
If you end up earning profits, the broker will transfer the specified sum into your account. However, in case of losses, the same is deducted from your account by the broker.
The profits are represented by a positive M2M, while the losses are negative.
Special Margin: Special margin is an additional margin applicable to all the traders who have an open position. Due to this special margin, the traders cannot trade further unless they have paid this amount.
It is imposed by the authorities to keep a check on excessive speculation in the commodity market and protect all the investors and traders.
Another major reason for imposing a special margin is regulating the circuits. The price circuits are put to avoid excessive upside or downside movement in a particular commodity.
The upper and lower circuit is based on the previous closing of that commodity.
Conclusion – MCX or Multi Commodity Exchange
We hope that this article has given a good understanding of Multi Commodity Exchange.
You have understood about Why to Trade via MCX, types of commodities traded, types of margins & more.
You can now open a commodity account & start trading via this commodity exchange.
Open a Commodity Demat & Trading Account Now! – Fill up the Form
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