MCX Meaning - Learn What is MCX, Its Advantages, and More

• An Exchange is a physical or virtual place where buyers and sellers of any asset are matched, an acceptable price is agreed upon, and trade is completed safely. Commodity means a physical asset is traded, and six Commodity trading exchanges in India regulate this transaction. Any commodity research in India will point to MCX for price direction.

• MCX (Multi Commodity Exchange of India Ltd) is probably the youngest National Exchange in India (less than 20 years of age), though Commodity trading is as old as human civilization. So, before setting up the MCX, trade was made through private, unsupervised contracts in India.

• The safety net provided by the MCX benefits a variety of its participants. Producers, Traders, Investment Institutions, Portfolio Managers, Hedge Funds, and Retail Investors – to name a few. All these participants contribute to ‘market making’ and ‘price discovery’ of commodities in Spot and Futures markets – creating an MCX stock exchange, as it were.

• Commodities can be traded for immediate Spot delivery on MCX. However, the largest turnover is maturity at a future date via Derivative instruments called Futures or Options contracts. The primary difference between the two contracts is:

• Futures is an agreement between buyer/seller to buy/sell a commodity for a future maturity.

• Options give the buyer the right but not the obligation to buy/sell a futures contract at a later date for an upfront fee paid to the seller.

• Other than commodities, various Indices are traded on MCX, with commodities being underlying assets.

What is MCX?

• If MCX is the leading Commodity Exchange in India, what does it do for its members?

• The essential function MCX performs is risk management of commodity prices, i.e., protection from market turbulence. It is no surprise that MCX has achieved the highest daily turnover of Rs.1.19 lakh crores ($ 15.86 billion) in 2021. (MCX Annual Report 2020/21).

• Multi Commodity Exchange of India (MCX) is supervised and regulated by SEBI. It provides a transparent trading platform, releasing critical data for commodity research and real-time prices to ensure fair trade practices. 

• It has a presence in 1,103 centres in India and enjoys a 92% market share in Commodities’ Futures contracts (2021). The need for its presence in so many places is due to the nature of assets it deals with (i.e., Commodities).

How is Commodity Trading Different From the Equity Market?

• MCX standardizes each product into tradable units based on weight or volume for different maturities. (Eg. Gold Mini of 100gm, Crude Oil of 100 barrels per contract)

• Traded commodities can be either physically delivered or cash-settled based on MCX’s daily Settlement price (Closing price or Due Date Rate).

• When a trader opts for physical delivery of the commodity, the actual delivery takes place at MCX’s approved warehouses or delivery centres, which differ between commodities. (Eg. Gold and Silver contracts ex-Ahmedabad or Zinc ex-Thane)

What is MCX Trading?

The answer to ‘What is MCX trading?’ evokes the response that it uses the four commodity contracts written by MCX for its Clients. These are:

• Precious Metals: Bullion (Gold and Silver)

• Base Metals: Aluminum, Copper, Lead, Nickel, Zinc

• Energy: Crude Oil, Natural Gas

• Agri Commodities: Cardamom, Cotton, Crude Palm Oil, Kapas(Cotton unpinned), Mentha Oil, Rubber

Further, MCX’s key index (MCX iCOMDEX) is the benchmark for commodities futures’ prices in India. This is the composite unit, underlying Futures Contracts, showing the performance of a basket of commodities traded at MCX. By trading Comdex, we can take an exposure on the entire basket. MCX also has three sectoral indices, whose futures contracts are traded actively (MCX BULLDEX, METLDEX, and ENRGDEX based on Bullion, Base Metals, and Energy sectors, respectively). This is in addition to four, Single commodity Indices based on Gold, Silver, Copper, and Crude Oil.

iCOMDEX has the greatest exposure to Gold and Crude (> 40%) within the basket.

Transaction Fees 

All Exchanges levy Transaction fees based on turnovers. MCX imposes exchange transaction fees on its member-brokers. In turn, the brokers pass on these charges to each client based on their trade turnovers. So, Exchange charges are actual income that flows back to MCX through brokers. This forms the mainstream of income for MCX, without which it would not be able to meet its overheads such as Trading platform maintenance, Salaries, Utilities, etc. 

MCX divides commodities into two categories, with all metals and most commodities charged a fee of Rs. 2.60/lakh turnover. Alternately, some agriculture products are charged lower rates (e.g., Pepper Rs. 0.50/lakh).

MCX Transaction fees form part of a host of Regulatory Fees that the Trader must pay: ie. SEBI fees, Stamp Duty, GST, and Securities Transaction Tax (on Shares) or Commodities Transaction Tax (on Commodities)

Besides these, the traders pay two other types of fees. They are:

• Brokerage Charges, incidents on the Trading account with brokers and

• The Depository Participant recovers DP charges in the trading account from part of charges towards Depository (NSDL/CDSL) and DP. 

Use Enrich Brokerage Calculator for a quick, comprehensive calculation.

How to Trade on MCX?

• The requirements to trade on MCX are:

• KYC documents in Trader’s name

• Open a demat account with a DP

• Commodity Trading account with a registered broker

• A designated SB or Current account for cash settlements, margin funding, etc.

Commodity traders usually have exposure to commodities for the present or future timeframes, and they utilize MCX contracts to manage/cover their anticipated price risk. However, it’s not only them. More and more Institutional and Retail investors find it an intelligent way to use MCX contracts to:

• Diversify portfolio 

• De-risk their portfolio and

• Exploit the profit potential of commodity prices,

• By studying one or more portfolios and technically analyzing their movements. 

• Unlike equities, commodities do the following:

• Commodities obey the laws of Supply and Demand closely.

• Domestic prices predominantly mirror global prices, with exceptions like Gold, where Indian demand drives global demand largely.

• Commodity prices are seasonal, especially Agri commodities, with each of them trending uniquely.

• Energy products like Crude and Natural Gas are highly sensitive to global inventory levels, especially short-term.

• Commodity prices are very sensitive to international politics and geopolitical factors.

Conclusion

The success of any financial exchange rests on its capacity to closely watch its market evolve to keep abreast of every trader/investor’s needs. This can be through timely identification of new commodities, developing the right set of products and contracts in demand, improving market practices, educating traders, and extending its client reach. 

MCX has been proactive in this area, spearheading a real MCX Stock Exchange. With its strategic alliance with Chicago Mercantile Exchange (CME Group), London Metal Exchange, and many others, this exchange has made commodities trading in India reach every corner and its inhabitants. So, when Commodity Trading Exchanges in India are researched, none compete to top the list other than MCX!