ABOUT COMMODITIES
Commodities market, contrary to the beliefs of many people, has been in existence
in India through the ages. However the recent attempt by the Government to permit
Multi-commodity National levels exchanges has indeed given it, a shot in the arm.
As a result a number of exchanges
have sprung up across the length and the breadth of the nation and have bundled amongst
themselves a number online trading facilities, robust surveillance measures and a hassle-free settlement system.
The futures contracts available on a wide spectrum of commodities like Gold, Silver,
Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Chana etc., provide excellent
opportunities for hedging the risks of the farmers, importers, exporters, traders
and large scale consumers. They also make open an avenue for quality investments
in precious metals. The commodities market, as it is not affected by the movements
of the stock market or debt market provides tremendous opportunities for better
diversification of risk. Realizing this fact, even mutual funds are contemplating
of entering into this market.
Indian markets have recently thrown open a new avenue even for the retail investors and
traders to participate: commodity derivatives. For those who want to diversify their portfolios
beyond shares, bonds and real estate, a commodity is one of the best options.
Commodities actually offer immense potential to become a separate asset class for market-savvy
investors, arbitrageurs and speculators. Commodities are easy to understand and are based on
the fundamentals of demand and supply. Retail investors should understand the risks and
advantages of trading in commodities futures before taking a leap. Historically, prices
in commodities futures have been less volatile compared with equity and bonds, thus providing
an efficient portfolio diversification.
Like any other market, the one for commodity futures plays a valuable role in information
pooling and risk sharing. The market mediates between buyers and sellers of commodities
thus making the underlying market more liquid.
With the high quality infrastructure already in place and a committed Government providing
continuous impetus, it is our responsibility, the intermediaries to deliver these benefits
at the door-step of our esteemed customers. With our expertise in financial services, existence
across the lengths and breadths of the country and an enviable technological edge, we are all set
to bring to you, the pleasure of investing in this burgeoning market, which can touch upon the lives
of a vast majority of the population from the farmer to the corporate alike. We are confident that
the commodity futures can be a good value addition to your portfolio.
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| Why Trade in Commodity Exchanges? |
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Hedgers
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No counter party risks.
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Higher Leverage: Get high exposures for the margin provided.
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Prices are pegged to international markets of NYMEX, CBOT, CME, LME etc.
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Portfolio diversification: An investor can now diversify his portfolio by investing in commodities markets.
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Arbitrage opportunities: Take the advantage of price spreads, calendar spreads and Inter exchange spreads.
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| Who are the players in the Commodity Market? |
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Investors in the commodities market fall into the following categories:
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Hedgers: Hedgers enter into commodity contracts to be assured access to a commodity, or the ability to sell it, at a guaranteed price. They use futures to protect themselves against unanticipated fluctuations in the commodity's price.
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Speculators: Speculators are participants who wish to bet on future movements in the price of an asset. Individuals, willing to absorb risk, trade in commodity futures as speculators. Speculating in commodity futures is not for people who are averse to risk. Unforeseen forces like weather can affect supply and demand, and send commodity prices up or down very rapidly. As a result of this leveraged speculative position, they increase the potential for large gains as well as large losses.
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Arbitrageur: A type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and capture risk-free profits. Arbitrageurs constitute a group of participants who lock themselves in a risk-less profit by simultaneously entering into transactions in two or more contracts.
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| HOW DO COMMODITY PRICES MOVE? |
| The following factors have an impact the commodity prices. |
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Natural Factors: Soil and climatic conditions, natural calamities etc.
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Government Policies - e.g. EXIM Policies like tariff rates, minimum support prices.
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Annual production, consumption and carry-over quantity of stocks.
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| Economic policies and conditions: |
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| Who regulates the commodity exchanges? |
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Just as SEBI regulates the stock exchanges, commodity exchanges are regulated by
the Forwards Market Commission (FMC), which comes under the purview of the Ministry of Food,
Agriculture and Public Distribution.
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| What are the major commodity exchanges? |
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Multi-Commodity Exchange of India Ltd, Mumbai (MCX).
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National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).
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National Multi Commodity Exchange, Ahemdabad (NMCE).
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| What are the commodity derivatives market timings? |
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The commodity derivative market timings are:
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Monday to Friday: 10 am to 11.30/11.55 pm (Agri-commodities up to 5 p.m. only)
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Saturday: 10 am to 2 pm
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| How risky are these markets compared to stock & bond markets? |
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Commodity prices are generally less volatile than the stocks and this has been statistically proven.
Therefore it's relatively safer to trade in commodities. Also the regulatory authorities ensure through
continuous vigil that the commodity prices are market-driven and free from manipulations. However all
investments are subject to market risk and depend on the individual’s decision.
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| What are the charges involved in trading on the exchanges? |
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Brokerage
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Service Tax
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Transaction Charges
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Stamp Duty
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| How are commodity contracts settled? |
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All open contracts, which are not intended for delivery, are settled in cash.
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They are settled on the following day after the contract expiry date.
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| Is delivery of commodities available? Is it compulsory? |
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Yes, but its not compulsory, buyers and sellers intending to take/give delivery should
express their intention to the exchange. The exchange will match delivery randomly and
assign it accordingly.
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| Are options also allowed in commodity derivatives? |
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No. Options in goods are presently prohibited under Section 19 of the Forward Contracts
(Regulation) Act, 1952. No exchange or person can organize or enter into or make or perform
options in goods. However the market expects the government to permit options trading in commodities soon.
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