Updated Feb 20, 2022

What is Multi Commodity Exchange(MCX)?

What is Multi Commodity Exchange?

Introduction

A lot of investors trade in the secondary market, which involves buying stocks, and shares. However, very few investors are aware of trading commodities, which deals with tangible assets such as gold, rubber, spices, oil, and other raw materials. Most of these investors do this to maintain diversity in their portfolios, and investing in these can reduce the risk of losing money from there.

MCX stands for Multi Commodity Exchange. It is like trading stocks and shares; the only difference is that the investor exchanges money for commodities with the Indian government. The MCX has been operational since 2003, and it is the largest commodity derivatives exchange in India. On this online platform, buyers and traders can share commodities that can range from mined goods to agricultural products.

What Are the Benefits of MCX Trading?

Despite the number of deals that are struck through commodity exchanges, the lack of awareness about them may be the cause for low participation in this sector. There are many benefits to multi-commodity trading that include:

1. Portfolio Diversification

The ability for investors to diversify their portfolios. This is because commodities have a low to a negative relationship with other asset classes, making them a lower risk to trade.  For example, if the stock market crashes, equity investments can also come under pressure. However, when it comes to commodities like gold, the price will increase as more investors choose to put their money into safer assets.

1. Protection Against Inflation

Trading in commodities can also help investors hedge into other industries and supply the commodities required to manufacture goods. This protects them against price fluctuations and safeguards them in the case of crisis. Commodity trading also protects investors from inflation costs. Since the price of the commodity does not rise or fall regularly, investors need not worry about high prices in the future.

1. Easy Liquidation of Assets

It is common to equate commodity trading with the actual movement of the assets. This could mean that these assets might be difficult to sell. However, with commodity exchanges, this trade becomes much easier and trading through commodity derivatives which can be easily liquidated, is a simple process that has helped many investors.

What are the Margins for Multi Commodity Exchange?

Buying and selling commodities happen on the MCX platform. Recently the Securities and Exchange Board of India mandated that the regulators of the mcx have a physical settlement for the exchange of commodities between them and the traders. For this, there are three margins that can be considered:

1. Initial Margin

This is the minimum amount a trader needs to pay to enter future contracts on the MCX platform. Without this guarantee, their trade might not go through, and it is important to settle on an initial margin of trade.

1. Mark-to-Market Margin

The mark-to-market margin is made to calculate profits and losses. For traders, this means if they make a profit on selling their assets, then the money is transferred through the MCX platform to their accounts. In the case of a loss, the money is debited from the trader’s account into the MCX platform.

1. Special Margin

This is an amount collected to control the volatility of the asset. In case an asset is in demand and is rare in supply, it can mean that the price fluctuates depending on how much a trader demands for a certain amount of that asset.

What Factors Affect Multi Commodity Trading?

Multi commodity Trading depends on many factors. This is because a lot of the commodities that are traded through the MCX platform are agricultural products; this means that the investors and traders need to be aware of the factors that can affect the number of commodities traded. Some important factors to keep in mind are:

1. Economic and Political Conditions
2. Government Policies
3. Weather Conditions

Conclusion

Trading commodities is very different from trading stocks and shares. Here, the agreements are physical, and there are amounts to be paid between both parties at certain times. However, there is room for interpretation when it comes to the amount. Multi Commodity Trading has many exchanges in India which control the exchange of commodities between investors and traders, making for a smooth transaction.