Commodities are an important part of everyone’s life and they have been traded for times immemorial. However, the mechanism of trading has changed with the passing time.
In the olden times, commodities were traded physically, like buying and selling cattle, metals, spices, grains etc. In that case, the physical deliveries of the commodities were made and the payments were also made physically. With the advent of technology, the face of commodity trading has drastically changed.
Now, the commodities are traded online over the commodities exchanges. They are bought and sold in the dematerialised form and do not involve actual delivery. The profit and loss settlements are made online and the balance is transferred to the trader’s account.
Therefore, since the commodities are being traded online, the first requirement to become a commodity trader is to open commodity trading account. It is a demat account which can be opened either with a bank or with a licensed stockbroker. It is advisable to open commodity trading account with a broking company, as the brokers provide better and more services than the banks.
So, the first critical step to open commodity trading account is to select the suitable broking company.
There are many companies in the market and each has its own strengths and drawbacks. The choice of the broking company is critical because it is the broking company and its brokers that hold your account and execute your trades. The brokers also help in educating the traders on commodity trading and in making sound financial decisions through their recommendations.
So, if the broker himself is not a successful and well-informed person, the trader may end up losing a lot of money in no time. Also, while choosing a broker to open commodity trading account with, the trader must see the kind of fee they charge and the fee varies from company to company and there may be various types of fees like the commission (brokerage charges), platform fee, clearing fee etc.
Another factor to consider while choosing a broker is the kind of services they provide on their platform. The platform can be checked using their free trial to see if it has all the requisites like charts, market data, research and analysis available on their online trading platform. Some of the most reliable and efficient full-service broking companies for commodity trading in India are Karvy Online, Angel Broking, IIFL etc. and some of the discount broking companies are Zerodha, Upstox, Trade Smart Online etc.
After the broking company has been selected by the trader, he needs to fill up an application form to open commodity trading account with the broking company. The forms are available online and require information about the age, financial status, trading experience of the trader. All this information is very important to both the trader and the broker because both are at risk with each other.
The broking company assesses the financial condition, risk appetite and personal experience of the trader through the application form and makes sure that the trader has enough financial cushion to take care of him in case he loses his initial investment. This is also mandated by the regulators. The broking company will also understand the trading experience the applicant has to know if he will be able to sustain the pressure of commodity trading.
So, the net worth, age, income, credit rating and trading experience mentioned in the application form is carefully analysed and checked by the broking company before approving to open commodity trading account for a trader.
Once all the paperwork, including the application form, supporting documents, member-client agreement and all other required documents have been submitted to the broking company, they take about 2-3 days to study the documents and then come up with the decision whether to approve or deny the application.
If the paperwork is approved, the commodity trading account is opened for the trader with the broking company and he gets the information regarding his account number, password and other instructions.
The trader also has to deposit the initial margin money into the account as soon as the account is open. Initial margin amount is generally 5-10% of the contract value. In addition to the initial margin, maintenance margin also needs to be maintained by the trader in his account, which will ensure that the trader is able to pay off in case he suffers any huge loss due to adverse price movements.
As soon as all these formalities are completed, the commodity trading account for the trader is officially open and he can start trading using that account at the same time. Thus, the process to open commodity trading account is simple but involves a lot of paperwork so that both the parties are well aware of each other’s circumstances, financial ability and risks.
In case you are looking to get started with Commodity Trading or investing in any other financial segment – just fill in some basic details in the form below.