Before money came into existence it was the exchange of commodities or commodity trading that was prevalent among people. The invention of wheels made the commodities from one habitat or region to be exchanged with the basic needs of others. Now after thousands of years it has formed a full circle in the form of MCX which is a multi-commodity exchange of India Ltd.
Formed in the year 2003, it is a multi-level platform for all commodities across India to be traded online. Within just 15 years of its operations, the turnover of the Muti commodity exchange skyrocketed to more than ₹50 trillion in 2017 alone.
It is placed in the seventh position among the global commodity exchanges in terms of the number of future derivatives traded in 2017.
As far as 2018-19 numbers are concerned, they are yet to be released but are certainly much larger than the numbers of previous years.
MCX: How It Work, Features And Specifications
MCX is the largest independent commodity exchange based in India. It is listed in the Bombay Stock Exchange (BSE) which makes it India’s only publicly listed exchange in 2012.
With the merger of the FMC or the Forward Markets Commission the earlier governing body of the MCX with SEBI in 2015, now MCX is regulated by Securities Exchange Board of India (SEBI).
Multi commodity exchange provides a platform in which options of bullion, energy, non-ferrous metals and an extensive range of agricultural commodities are traded.
Before we jump into more details, let’s have a quick look at some of the basics first:
What is a Commodity?
Commodities are mostly the building blocks for more complex goods and services. They are the basic raw materials in commerce that individuals or institutions buy or sell.
Categories Of Commodities: There are fundamentally three categories of commodities which include:
Agriculture: This includes agricultural products like food crops, livestock, and industrial crops. Multi commodity exchange has fewer contracts in the agricultural sector.
Energy: Multi commodity exchange is being considered as the metal and energy exchange has the most traded contracts in the energy category of commodity. It includes all form of energy including crude oil, uranium, ethanol, electricity and natural gas.
Metals: All kinds of metals including the inestimable gold are the core traded contracts of Multi commodity exchange.
Trading in commodities:
Trading in commodities takes place either in spot markets or futures markets.
The spot markets are transacted with spot delivery of commodities and payments. In commodity markets, futures trading are done in way of standardized contracts with the anticipated increase or decrease in prices.
These transactions are done electronically and it is not necessary to end with physical delivery of commodities and can be settled in the form of payments. Multi commodity exchange provides the platform for different month future contracts which are traded as per the base of the spot price.
To buy gold in the spot market the payment has to be made in full immediately. But for trading gold in MCX it is enough to part with only 10 – 20 % approximately for the amount of gold purchased in the form of derivatives or options.
The purchase of these gold derivatives can be done as per contracts of the current month which runs for the full month and expires on a particular day for each metal.
The contracts are based on the amount of the quantity of gold purchased. Anyone can buy any number of contracts for any of the months. The contract which is bought could be sold between any time from the time of purchase till its expiry date.
If not sold at the expiry date it automatically squares of with the closing price of the expiry date. And the difference of profit or loss is credited or debited in the trading account.
MCX – Benefits
Unlike the equity markets which have a very limited time frame of trading in a day, the trading in the MCX could be done till midnight and if done with patience, discipline, knowledge and many more factors may yield monumental profits. The following are some of the advantages of multiple commodity exchanges:
Low margins for high profits: With low margins for the commodities which are only approximately 1/5th or less of the total purchase value of the commodity and a longer period of expiry with distant month contracts it is possible to make windfall profits if predicted correctly of price rise or fall in the particular commodity.
Transparency: All the trading volumes, prices, their changes are totally transparent and in an organized structure.
Diversification & liquidity: The wide range of opportunities in the form of many month contracts of derivatives & options, innumerable commodities to trade provide the necessary diversification and liquidity in multiple commodity exchange trading.
MCX – Concerns
The same volatility of the commodities market which makes huge profits could be counterproductive done without the proper knowledge and other factors. The negatives of MCX could be mainly because of the volatility among others which include:
Volatility: A recent research has concluded that commodities trading has doubled the risk of trading in stocks and four times more risky than trading in bonds.
No Constant Income Generation:Investing in commodities may sometimes be stagnant or on the negative even if done with prudence and patience. The income generation is not constant and could not be relied on day to day living or other major responsibilities.
MCX – Conclusion
The commodities market is one of the foundations of the global trade system for decades in developed countries and a new concept for Indians. The way the turnover is increasing every day in MCX is clear proof of its dominance in the commodity trading market.
The transparency, liquidity, regulations, low investment with high returns, the agricultural produce getting its right value, and many more make the multi-commodity exchange the most sought trading platform for Indians to make their life prosper along with it making India one of the superpowers of the world.
In case you are looking to invest or trade in commodities via MCX or any other related exchange, let us assist you in taking the next steps forward:
If you are looking to know more about the Indian Share Market basics, here are some reference tutorials for you: