Understanding the commodity trading

Having known about what commodities are, let us know how to trade in commodities. As you know, there are two commodity exchanges in India Multi Commodity exchange (MCX) and National Commodity and Derivative Exchange (NCDEX). MCX is particularly popular for the metals and energy commodities. Let us try to understand how a commodity contract works; by considering the example of gold.

Gold is very actively traded contract in MCX. And, it is one of the most popular bullion contracts that gets traded on MCX, which comes in a few variants. Here is a list of all the different types of gold contracts.

• Gold
• Gold mini
• Gold guinea
• Gold petal

All these variants belong to the same underlying that is gold. There is a contract specification for each commodity which can be downloaded from the MCX website. As of today, the price of gold is Rs 30,672 per 10 grams.

The lot size is around 1kg. So, the contract value would be 1,000 into Rs 30,672 which amounts to Rs 30,672,000. To trade in this, we need to maintain a margin amount which is approximately 4 per cent; this amounts to 1,22,688.

However, online margin calculator from various agents like Zerodha help us to calculate this. Since the amount is huge it prohibits many retail traders to take positions in gold. For this reason, there are contracts like gold mini and petal. 

Let us assume that you buy one lot of gold on MCX this means you have to park close to Rs 1.25 lakh as margin and with each tick you will make either Rs 100 profit or loss. We divide 1,000 grams with 10 grams to arrive at this. 

Gold contract begins on the 16th day of the contract launch month. Gold commodity futures contract expires on 5th of every month. One needs to close the position before first of the expiry month in order to avoid getting into the physical delivery of commodities.

Settlement in equities is always in cash not physical. However, when it comes to commodities the settlement is physical and their delivery is compulsory. This means if you hold five lots of gold and you opt for delivery then you will get 5 kg of gold.

In order to get the delivery of the commodity one has to express his intention to do so. This has to be done any time before four days to expiry. Since delivery is compulsory for gold contracts it makes sense to close or square off this contract at least four days before the expiry of the contract. (The author is a homemaker who dabbles in stock market investments in free time)