Commodity Trading Account

The forward market commission (FMC) functions as a regulatory authority in the commodity market. The National Commodity and Derivative Exchange (NCDEX), Multi-Commodity Exchange (MCX) and National Multi Commodity Exchange (NMCE) are the commodity exchanges present in India.

In order to open a commodity account you need to submit an address and an identification proof, such as a copy of the voter's card or the passport, a bank account statement, copy of the PAN card which form a part of the know your customer (KYC) norms. This is similar to the opening of a demat account in the equity market.

A trading account will have to be opened with National Spot Exchange Limited (NSEL) and a demat account with a depository such as National securities depository limited.

A minimum amount of INR 5000 is sufficient to trade in most commodities. The brokerage charges are in the range of 0.1-0.3% of the contract value. Transaction charges are in the range of INR 5-10 per Lakh per contract. The brokerage varies based on the type of commodity.

Investments in commodities are made in the form of contracts between the buyer and the seller. This is basically an agreement to buy and sell a commodity at a specific price and time frame. In the trading of commodities no actual transport and storing of commodities takes place as the process is full of hassles. Only an agreement takes place. Under these kinds of future contracts profits or losses occur based on the price movements of commodities within that time frame. Under a commodity future contract there is an agreement between two parties the buyer and the seller to sell the underlying commodity at a certain fixed price at a certain time in the future .This is an obligatory contract. The contracts are executed on a commodity exchange.

In India there are three National level commodity exchanges such as multi commodity exchange of India ltd (MCX), National Commodity and Derivative Exchange (NCDEX) and National Multi Commodity Exchange of India. Trading charts, technical analysis commodity news are all provided in the trading account. High end integrated trading applications provide instantaneous execution, reliability and efficiency in the execution of trades.

The investor registers with a broker after going through the "Know Your Client" procedure similar to equity (stock) trading. Brokers have membership with the MCX or the NCDEX. The basic requirement includes a bank account and commodities demat account from the National Securities Depository Limited to trade on NCDEX. Investments are made with amounts as low as INR 5,000.The margin amounts are payable upfront through a broker. These margins range from 5-10% of the contract and hence INR 5,000 is sufficient for trades in most commodities.

The choice has to be made between cash and delivery. If a cash settlement is done no delivery of the commodity takes place .If the transaction is delivery based then warehouse receipts are required. Brokerage charges generally range from 0.1- 0.3 per cent of the contract value. Transaction charges are INR 5-10 per lakh / per contract. The brokerage costs cannot exceed the maximum limits set by the commodity exchanges.