The working of national commodity and derivatives exchange (NCDEX)

The National Commodity and Derivatives Exchange (NCDEX) is an online commodity exchange headquartered in Mumbai, India. It facilitates trade in various commodities through a regulated platform. NCDEX aims to bring transparency and efficiency to the commodity derivatives market and is a benchmark for setting commodity prices across India.

• Table of contents

1. NCDEX definition
2. The working of NCDEX
3. The functioning of NCDEX
4. Trading process at NCDEX
5. Commodities NCDEX trade
6. Benefits of trading of NCDEX
7. How to open an NCDEX Demat account?
8. Difference between NCDEX and MCX
9. Trading in NCDEX: Important considerations

NCDEX definition

NCDEX stands for National Commodity and Derivatives Exchange Limited. It is an online commodity exchange based in Mumbai and regulated by the Securities and Exchange Board of India (SEBI). It offers facilities for trading in commodity derivatives like futures and options. It aims to provide a nationwide online trading, clearing and settlement platform for commodities.

The working of NCDEX

NCDEX provides an electronic platform for trading in commodity derivatives. It offers futures trading in various agricultural and non-agricultural commodities. The key functions of NCDEX are listed below.

• Facilitating transparent price discovery and price risk management
• Providing a nationwide online trading platform
• Clearing and settlement of trades through delivery and cash settlement
• Disseminating real-time trade information
• Ensuring financial integrity through margining and monitoring positions
• Ensuring integrity of delivery through a nationwide warehouse network

The functioning of NCDEX

NCDEX operates like any other stock exchange with buyers and sellers placing orders through registered brokerages. Here are some of the processes involved, in no particular order:

1. Farmer or seller brings produce to the warehouse accredited by NCDEX. The warehouse issues a quality certificate and records the stocks deposited.
2. The seller sells the warehouse receipt representing the commodity to a buyer on the NCDEX platform through a broker.
3. The buyer in turn can sell the warehouse receipt on NCDEX if they wish to square off the position prior to expiry.
4. On expiry, the buyer with an open position must pay the final settlement price to the seller in cash and take physical delivery of the commodity from the accredited warehouse.

Trading process at NCDEX

1. You need to open an account with a SEBI registered broker who is a member of NCDEX.
2. You can then place buy or sell orders for commodity futures through the brokerage firm on the NCDEX platform during market hours.
3. Once your order matches an opposite order, the trade is executed at the listed price.
4. All trades are settled by NCDEX through the broker. For cash settlement, account balances are adjusted. For physical settlement, commodities are delivered.
5. Your broker will provide reports on trade confirmations, settlements, account balances, margins due and other information.
6. You need to monitor your positions and keep adequate margins with the broker as per NCDEX requirements.

Read Also: Trading basics: History, methods, and benefits

Commodities NCDEX trade

NCDEX offers futures trading in various agricultural commodities such as

• Grains - Wheat, Rice, Maize, Barley, Soybean
• Pulses - Chana, Masur, Tur
• Oilseeds - Soybean, Refined Soy Oil, Crude Palm Oil, Mustard Oil
• Spices - Jeera, Turmeric, Pepper
• Fibers - Cotton, Kapas
• Plantation - Rubber, Coffee, Cardamom
• Energy - Crude Oil, Gasoline, Natural Gas
• Metal - Steel, Nickel, Zinc, Lead

It covers commodities across agriculture, energy, metals and other segments. NCDEX aims to have a diverse basket of commodities to enable wider participation.

Benefits of trading of NCDEX

• Transparent price discovery and ability to hedge price risks
• Access to a nationwide market and large number of buyers/sellers
• Ability to trade in small lot sizes suitable for smaller participants
• Assured and timely settlement of trades
• Robust risk management system with margining, limits and monitoring
• Efficient trading through latest technology and trading tools
• Reduced transaction costs through economies of scale
• Access to fair prices due to minimal middlemen and local influences
• Regulated trading practices ensuring fairness and compliance

How to open an NCDEX Demat account?

To trade on NCDEX, you need to open a demat account with an NCDEX registered broker. The steps are.

1. Identify a registered broker and fill the account opening form with your details.
2. Provide your identity and address proof documents like Aadhaar for KYC compliance.
3. Authorise the broker as your power of attorney holder for NCDEX trading.
4. Deposit the required minimum funds to activate your trading account.
5. The broker will provide your login credentials and trading software access.
6. You can then start trading once the account is activated by the broker. Ensure you understand the trading rules and risks involved.

Read Also: Does investment in mutual funds require a Demat account?

Difference between NCDEX and MCX

MCX (Multi Commodity Exchange) and NCDEX (National Commodity & Derivatives Exchange) are two of India's key commodity exchanges, each catering to distinct segments of the market. Understanding their differences helps traders and investors choose the right platform based on their trading objectives.

Commodity focus

• MCX: Primarily facilitates trading in metals, energy products, and a few agricultural commodities. It offers contracts for precious metals like gold and silver, base metals such as copper and aluminum, and energy resources including crude oil and natural gas.
• NCDEX: Specializes in agricultural commodities, with a few non-agricultural products. It features contracts for crops such as soybean, wheat, chana (chickpeas), and turmeric, making it a key platform for agricultural producers and traders.

Product offerings

• MCX: Covers a diverse range of commodities across metals, energy, and select agricultural products. Its broad spectrum caters to investors interested in both industrial and financial commodities.
• NCDEX: Primarily deals in agricultural futures and options, offering a specialized platform for those involved in crop trading and related industries.

Market participants

• MCX: Attracts a wide variety of traders, including institutional investors, retail participants, and businesses in the metals and energy sectors.
• NCDEX: Primarily serves farmers, producers, and traders in the agricultural sector, providing a targeted platform for agricultural commodity trading.

By focusing on different market segments, MCX and NCDEX serve distinct roles in India's commodity markets. While MCX appeals to traders dealing with metals and energy, NCDEX remains the preferred choice for those engaged in agriculture-based trading and price risk management.

Trading in NCDEX: Important considerations

1. Open a commodity trading account with a SEBI registered broker who is a member of NCDEX.
2. Deposit funds into this account to maintain adequate margin as per NCDEX requirements.
3. Place buy or sell orders through the brokerage firm either online or by calling your broker.
4. Monitor your trade positions daily and keep sufficient margin to prevent any position getting squared off.
5. For taking delivery of commodities, ensure you have adequate funds to pay the full value on contract expiry.
6. Exit profitable positions at appropriate times and square off positions prior to expiry to avoid unwanted delivery.
7. Keep abreast of factors affecting commodity prices using research reports and analyst advice to take informed trading decisions.
8. Use stop loss orders to limit potential losses and maintain disciplined trading.

Conclusion

Trading on NCDEX requires understanding of commodities, prudent risk management and working through authorised brokers only. NCDEX has brought fair pricing and hedging opportunities even for small participants. It continues to widen its reach and add more commodities to offer a comprehensive risk management platform for commodities in India.

FAQs

What is NCDEX full form?

NCDEX stands for National Commodity and Derivatives Exchange Limited.

What is NCDEX in the share market?

NCDEX is a commodity exchange that facilitates trading in commodity derivatives like futures and options. It offers an electronic platform for commodity trading similar to the stock exchanges for equity trading.

What is the lot size for NCDEX?

The minimum quantity that can be bought or sold on NCDEX is called the lot size, which varies for each commodity. For example, gold has a lot size of 1 kg, crude oil has a lot size of 100 barrels and pepper has a lot size of 2 tonnes.

What is the difference between NCDEX and MCX?

NCDEX focuses on agricultural commodities while MCX offers metals, energy and bullion. NCDEX emphasizes physical delivery while MCX does more cash settlement. NCDEX is based in Mumbai while MCX is in Mumbai and Ahmedabad.

Which is better—MCX or NCDEX?

It depends on the commodity one wishes to trade. For agricultural commodities, NCDEX offers more choices. MCX has a greater focus on metals and energy. Overall, both exchanges serve important roles in their respective market segments.

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