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What are commodity markets?

Commodity markets are the place where primary or raw products are brought and transacted between buyers and sellers. There are two types of markets in India, i.e. Spot market and futures market.

What is the difference between futures market and spot market?

A futures market is a place/market where an agreement between two parties to buy or sell the underlying commodities at a future date at today's future price. The physical delivery of the commodity is taking place after the expiry of the contract. Physical market or cash market or Spot market is place where buyers and sellers actively participating and ends with the delivery of the commodity during the day.

Who is the controlling body of exchanges in India?

Securities Exchange Board of India (SEBI)

Which are the various major commodity exchanges in India?

Currently, there are three major national level commodity exchanges offering trading in commodity derivatives. They are Multi Commodity Exchange of India (MCX), National Commodities and Derivatives Exchange (NCDEX) and Indian Commodity Exchange Limited (ICEX).

What are the trade timings of commodity exchanges?

MCX – Monday to Friday 09:00AM-11:30/11:55PM*
NCDEX – Monday to Friday 09:00AM-09:00/09.30PM*
ICEX – Monday to Friday 09:00AM-05:00PM
*Closing hour may vary depending up on Day Light Saving Time (DST) changes in the US/UK.
Note: Derivatives trading in Agriculture commodities are available till 05.00PM in all exchanges. However, certain agricultural commodities like refined soy oil, crude palm oil, cotton etc. are available for trading till 09:00/9:30 PM.

Who are the participants of commodity market?

Individuals, high net worth individuals (HNIs), Corporate, Hedgers, farmers, processors and other people related to physical markets can trade in commodities. Internationally, the classification of clients is on the basis of commercials (who are hedging customer) and non-commercials who are speculative - trading type of clients.

Who are the players in commodity market?

Hedgers, speculators and arbitrageurs are the major participants in commodity market. Hedgers are main players in the market with an underlying risk in a commodity. Speculators are traders or investors who took benefit or profits based on price fluctuations. They essentially create more liquidity to the contracts. Arbitrageurs are other type of experienced group which make profits by exploiting the price discrepancies seen in different exchanges or the spot market by equally entering with the opposite positions of the same contract.

Is commodity trading suitable for a retail investor?

Yes, but retail investors should understand the risks associated with and advantages of commodity futures trading before taking the leap.

What are the various commodities available for trading?

In India, there are about 50+ major commodities available for trading in different exchanges. Commodities that are being traded in Indian markets can be broadly categorised as agriculture and non-agriculture commodities. Agriculture commodities includes Spices like jeera, turmeric, cardamom, pepper, Oil and oil seeds like soybean, rape mustard seeds, crude palm oil etc, Pulses, Cereals, Guarseed, Sugar, Cotton etc. Non-agriculture commodities includes precious metals, base metals, energy complex.

What are the various factors to be keep in mind before trading in commodity?

There are several factors that should be kept in mind while trading in commodities, which are shown below in terms of various segments in commodities:
Agri- Commodities: Monsoon, Carryover stocks, Crop acreage, Production, Imports and Exports, Government policies, Weather etc.
Non-Agri commodities: Bullion & Metals - Currency fluctuations, Global supply and demand factors, Inflation, Unexpected political, Social and Economic Mayhem.
Energy – Global Demand & Supply, U.S EIA inventory levels, OPEC decisions, Geopolitical tensions, U.S dollar.

How currency volatility affects the markets?

Currency volatility has a significant bearing on the commodity price moves. For example, bullion prices tend to rise on a rising Euro (This should not be taken as a reference outcome). On the other hand, commodities that are priced in dollar terms, like crude oil, tend to weaken when dollar strengthens.

How much I have to invest initially for trading?

You can have an amount as low as Rs 1,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 3-10 per cent of the value of the commodity contract.

What are the various charges included in trading?

Broking charges are the main cost while trading in commodities. Apart from that exchange levy, delivery charges, commodity transaction charges (only for non-agri commodities) and other applicable taxes are the other charges.

What is margin?

Margin is the amount which is required in advance to accomplish trades on the exchanges. There are different types of margins like, initial margin, special margin, delivery margin etc. charged by exchanges on different market condition.

What is MTM?

At the end of every trading day, the margin account of the trader / client is adjusted to reflect the participant’s gain or loss. The price changes on the close of every trading day may result in some gain or loss as compared to the previous day’s closing price. These price variations are netted into the daily margin account. This process is known as marking to the market.

What will happen if I failed to close my position on its expiry date?

If a trader or an investor fails to close his/her position on its expiry date, depending on the long/short position, he/she has to take or give delivery of the underlying commodity. If he/she is not willing to take the delivery, then a penalty has to be paid in case of Sellers Right contract based on the final settlement price.

What are the commodities available for physical delivery?

Almost all agriculture commodities traded in exchanges are available for physical delivery. Meanwhile, most of the non agri commodities are cash settled at expiry.

Whether D-mat account is needed for commodities trading?

Demat account is not mandatory for trading, however commodity Demat account is mandatory for all delivery based transactions.

What is warehouse receipt?

A warehouse receipt is a document that provides proof of ownership of commodities (e.g., bars of copper) that are stored in a warehouse, vault, or depository for safekeeping.
Warehouse receipts may be negotiable or non-negotiable. Negotiable warehouse receipts allow transfer of ownership of that commodity without having to deliver the physical commodity. Warehouse receipts also guarantee existence and availability of a commodity of a particular quantity, type, and quality in a named storage facility.

What is Hedging?

Hedging is a risk management strategy, basically involving taking equal and opposite position in futures market as a protection against the risk of loss due to fluctuation in prices in the spot market.

What is Arbitraging?

Arbitraging is the practice of making profits by the exploitation of the price discrepancies seen in different exchanges or the spot market by equally entering with the opposite positions of the same contract.

What is spread? And its types?

Spread is the difference between prices of two futures contracts of the same/similar commodity. Spread trading in commodities involves simultaneous buying of a commodity and selling of the same or similar commodity in order to profit from the change in price differential of the two contracts. Futures market can be a normal market or an inverted market. If the price of the far month futures contract is higher than the near month one, then it is referred to as “normal market”. On the other hand, if the price of a far month futures contract is lower than the near month one, then the situation can be referred to as “inverted market”.

Spread trading may be:
  • a. Intra-commodity, involving simultaneous buying and selling of same commodity with different expiry dates. It is also called calendar spread or intra-delivery spread.
  • b. Inter-commodity, involving spread trading between two related commodities. Eg. Lead and Zinc, Gold and Silver etc.
  • c. Inter-Exchange that involves spread trading in same or similar commodities on different exchanges.
  • d. Bull spread or bear spread- based on strategy adopted.

What is contango?

The market condition where, the futures prices of the contract is trading above the spot price. For example, Cardamom March futures is trading at Rs 1000 a kg while spot prices is at Rs 950 a kg.

What is backwardation?

The market condition where, the futures prices of the contract is trading below the spot price. For example, Cardamom March futures is trading at Rs 950 a kg and spot prices is at Rs 1000 a kg.

What is parity price?

A price for a commodity that is pegged to another price or composite of prices based on a given prior period or when the price of an asset is directly linked to another price. For e.g. Price of crude oil traded in India = Price of NYMEX crude oil x RBI reference rate/USDINR rate.

What are benchmark exchanges for major commodities?

For Gold, silver & Copper, U.S COMEX is the benchmark exchange. U.S NYMEX is considered as the benchmark for Crude oil & Natural Gas. Base metals trading in Indian exchanges track LME price as a benchmark.

What are the major international commodity markets and exchanges?

Major International markets are located in the U.S.A, Canada, U.K., Germany, France, China, Japan, India etc. Important commodity exchanges are COMEX, NYMEX, CME, CBOT, FTSE, LME, Shanghai Futures Exchange, TOCOM, BMD Malaysia etc.

Is there any correlation between Indian market and international markets?

Yes, for certain commodities Indian market takes international Commodity exchanges as a benchmark for price movements.

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