The commodity market is fast becoming one of the most popular segments of the financial markets in India. Commodity trading involves purchasing and selling derivative contracts such as futures and options. It allows you to speculate on the price movement of a wide range of agricultural and non-agricultural commodities.
As with any other security, trading in commodity derivatives can only be done through a commodity exchange. Three primary commodity exchanges are currently operational in India — one of which is the NCDEX in share market. It is one of the top exchanges for trading in agricultural commodities in the country.
Here’s everything you need to know about this commodity exchange and the various functions of the NCDEX.
What is NCDEX?
The National Commodity & Derivatives Exchange (NCDEX), based in Mumbai, is a fully electronic commodity exchange in India. Established in 2003, it offers a platform where farmers, traders, and investors can trade futures contracts on agricultural products like wheat, sugar, cotton, and spices. NCDEX helps in determining fair prices and managing risks for those involved in agriculture. It operates under the regulation of the Securities and Exchange Board of India (SEBI).
The functions of the NCDEX include the following:
- To act as a platform for price discovery and risk management for a plethora of commodities
- To provide ancillary services like clearing and settlement
Currently, the exchange offers derivative contracts for agricultural commodities and non-agricultural commodity across seven categories.
These seven categories include the following:
- Cereals and pulses
- Oil and oil seeds
- Fibres
- Soft commodities
- Guar complex
- Spices
- Metals
What does NCDEX do?
Numerous factors determine the prices of agricultural products. These prices may rise or fall depending on the changes in the market. Some of the external factors that affect the prices of agricultural produce include storms, drought, the arrival of early or late monsoons, and natural calamities, to name a few. So, a farmer expecting the prices of the produce to fall in the near future would want to be cautious and cover any unforeseen losses. This is where a farmer would enter into a futures contract, agreeing to sell their produce at a pre-determined price on a future date. Here, the NCDEX facilitates the trade and becomes the middleman between the farmer and an interested buyer.
How does it work?
NCDEX, a professionally managed multi-commodity exchange, is primarily an online platform for buying and selling agricultural commodities. However, it has widened its horizons and started trading in other commodities, such as energy resources and metals.
The actual trading process at NCDEX
- The process starts with registering market participants, such as commodity producers, traders, or institutional investors.
- Traders complete the necessary KYC (Know Your Customer) process.
- Once the KYC process is complete, traders can access the National Commodity and Derivatives Exchange's online trading platform. Here, they can easily view trade volumes, price fluctuations, real-time trading data, and market analytics.
The mechanism leverages high-end technology that offers speed, accuracy, and transparency. Moreover, market participants can also partake in different types of trading, such as spot trading, wherein commodities are traded with immediate delivery or derivatives trading, which includes futures contracts and agreements to sell or buy agricultural produce or a specific commodity at a predetermined price and future date. Derivatives trading is a useful mechanism wherein traders can hedge against fluctuating prices.
What does NCDEX primarily trade?
The National Commodity & Derivatives Exchange Limited (NCDEX) offers a comprehensive range of permitted agricultural commodities, totaling 23—the largest such selection. These commodities, including pulses, spices, and guar, are unique to NCDEX in the global market and hold significant economic importance for India, contributing substantially to the nation's international trade.
Advantages of NCDEX
Here are the advantages of NCDEX:
1. Market transparency
NCDEX has greatly contributed to increasing market transparency by providing an online platform to trade in commodity derivatives. The process of buying and selling commodity derivatives happens online, and every investor can review and analyse the market prices, expiry dates, and other factors without any possibility of fraud or scams.
2. Effective price discovery
NCDEX provides a transparent and efficient platform for price discovery of agricultural and other commodities. This helps farmers to price their products more accurately even if they are not participating in the derivatives market.
3. Lower costs
NCDEX has helped lower the cost of price data for farmers as the platform has allowed them to eliminate the middleman. Previously, intermediaries such as commission agents used to regulate much of the commodity marketplace knowledge in India, but NCDEX has changed it positively for the farmers.
4. Improved agriculture practices
NCDEX has played an important part in developing improved agriculture practices in the country. The introduction of the exchange has increased overall quality awareness through standardisation of quality requirements. Now, farmers are more aware of producing high-quality crops.
How to open an NCDEX Demat account?
Now that you know NCDEX’s meaning, here is the process of opening an NCDEX demat account:
1. Choose a stockbroker
Compare and analyse various stockbrokers who are members of the NCDEX commodity exchange. Compare their features and associated costs to find the most suitable one.
2. Fill out the application form
Complete the application form to open the NCDEX demat account with all the personal and bank details. You will also have to submit documents such as a PAN card.
3. In-person verification
In-person verification is compulsory to open an NCDEX demat account. The stockbroker will verify all the information and documents before approving them.
4. Demat account opening
After successful verification, the stockbroker will open your NCDEX demat account. You must deposit margin money after the account is opened to start NCDEX trading.
Additional link: What is trading
Benefits of trading on NCDEX
Now that you know the meaning of the NCDEX and its functions, let us understand the various advantages of trading on this commodity exchange.
1. Platform for price discovery
One of the main advantages of the NCDEX online platform is price transparency. At any point in time, commodity traders and agricultural producers can monitor the demand and supply dynamics and price movements of commodities. Thanks to such a free flow of information, market participants can efficiently discover the prices of various commodities.
2. Hedging of risk
In India, the prices of agricultural commodities can be very volatile since they are prone to seasonal fluctuations. Due to the increased volatility, agricultural producers and processors often endure significant losses. However, by using commodity derivatives like futures and options, they can hedge their risk effectively by taking up a contrarian position.
For instance, if an agricultural producer involved in cultivating paddy wishes to hedge against downside risk, they may choose to enter into a short position using paddy derivative contracts available on the NCDEX market. The profit from the short position will likely offset or reduce the real-world loss that the producer may incur due to a fall in the price of paddy.
3. Standardised contracts
The derivative contracts available on the NCDEX are standardised in terms of quantity. Retail traders who wish to trade in commodity derivatives can only do so in lots. This ensures smooth and hassle-free trading and settlement of contracts.
4. Mark-to-market (MTM) settlement cycle
In a Mark-To-Market (MTM) settlement cycle, the profits or losses from changes in the commodity prices are settled at the end of every trading day. This essentially means that if your open position incurs a loss or a profit, it will be reflected in your account at the end of each day.
The exchange will make a margin call if any fund shortfall arises due to a loss-making position. This requires you to deposit additional funds to cover the losses. Since the NCDEX follows the MTM method of settlement, the chances of dishonour of derivative contracts are negligible.
Difference between NCDEX and MCX
Both NCDEX and MCX trade in commodities. However, their terms of trading, functions, and features differ depending on the commodities they trade.
Criteria |
NCDEX |
Focus areas |
Agricultural commodities |
Founded |
2003 |
Regulated by |
Securities and Exchange Board of India (SEBI) |
Trading options |
Spot and derivatives |
Risk Management |
Robust, especially for agricultural |
Popular commodities |
Oilseeds, spices, and grains |
Primary users |
Agricultural producers, traders, retail |
Warehousing |
Extensive, with quality checks |
How can I trade on the NCDEX?
Trading on the NCDEX futures market is simple. All you need to do is open a commodity trading account with a commodity broker. Most major stock broking entities in India also offer commodity trading accounts.
Additionally, commodity derivatives are settled in cash or through physical delivery on the contract expiration date. Since commodities are physical and cannot be stored electronically, you don’t need a demat account to trade on the NCDEX. Instead, a commodity trading account alone is enough.
Conclusion
The NCDEX is one of the largest commodity trading exchanges in the country. The exchange specialises in agricultural commodities and offers an efficient and transparent way to profit from the price changes in these commodities.
However, before you start trading in derivative contracts available on the NCDEX commodity platform, remember to check the mode of settlement. Some contracts are mandatorily settled via physical delivery, meaning that the commodity you purchase will be physically delivered to you if you hold the contract until expiry. If you don’t wish to take physical delivery of commodities, make sure you square off your open positions before the contract expiration date.
