What is Commodity Market?A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In spot market, commodities are bought and sold for immediate delivery, whereas in derivatives market, various financial instruments based on commodities are traded. These financial instruments such as 'futures' are traded in exchanges.
Why invest in commodities?
What are Commodity Futures?Commodity Futures are contracts to buy/sell specific quantity of a particular commodity at a future date. It is similar to the Index futures and Stock futures but the underlying happens to be commodities instead of Stocks and indices.
How does futures trading work?A future trading is trading of futures contract. The buyer of futures contract has a right to purchase the commodity of same quality, quantity in specified time from the seller of the contract.
Who regulates the commodity market?Just as SEBI regulates the stock market, Forward Markets Commission (FMC) regulates commodity market.
Who invests in commodities?a. Investors.b. Producers / Farmers.c. Importers / Exporters.d. Commodity financers.e. Agricultural credit providing agencies.f. Hedgers, speculators, arbitrageurs.g. Large scale consumers. For e.g. refiners, jewelers, textile mills.h. Corporate having risk exposure in commodities.
Who cannot trade in commodities futures at present?Banks, Mutual funds, FIIs, and NRIs are not allowed to trade.
Can a NRI trade in commodities in India?No, NRIs are not allowed to trade as of now.
How are futures prices determined?Futures prices evolve from the interaction of bids and offers emanating from all over the country – which converge in the trading floor or the trading engine. The bid and offer prices are based on the expectations of prices on the maturity date.
What is the difference between spot and futures trading?Say a jeweler requires 100 gms of gold 3 months from now. He goes to gold smith and buys and takes delivery of the consignment (gold) at the quoted price. This is spot transaction. If the same jeweler opts for a 3-month exchange traded future contract, he buys a future contract in gold at a price decided today but agrees to take delivery at a future date. This is called a futures transaction.
Which are the major commodity exchanges in India?There are 24 commodity exchanges in India. There are Two national level commodity exchanges to trade in all permitted commodities. They are:
Multi Commodity Exchange of India Ltd, Mumbai (MCX) (www.mcxindia.com)MCX is an independent and de-mutualised multi commodity exchange. MCX features amongst the worlds top three bullion exchanges and top four energy exchanges.National Commodity and Derivative Exchange, Mumbai (NCDEX) (www.ncdex.com)
What are the exchange timings?Both MCX and NCDEX provide trading facility from Monday to Friday.
Are options also allowed in commodity derivatives?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.
Which Commodities i can trade In?The following commodities are actively traded in these two Exchanges:-
Which exchange should I select for trading?Both the commodity exchanges have done exceedingly well over the years, in terms of risk management, volumes or launching new & better commodity products. Before choosing an exchange you need to check the following: • The commodity you wish to trade is listed on that exchange
• Check the contract specifications of that commodity to ensure it suits you best
• There is enough liquidity i.e. price difference between the best buyer (bid) and best seller (offer) should be minimal in the given commodity (i.e daily volumes are high & you will be able to liquidate your position at will)
• Commodity price should be in sync with the physical market prices or its respective benchmark prices
• The exchange that matches the above mentioned characteristics can be your choice.
What do you need to start trading?You are requested to fulfill the 'know your customer' norms with a Reliance Commodities Ltd. A photo identification, PAN and proof of address are essential for registration. You will also have to sign the necessary agreements with Reliance Commodities Ltd.
What is Speculating?Speculating is taking a position based on expectations about whether prices will rise or fall in the future hoping to profit from the price change.
What is Arbitrage?A trading strategy that looks to take advantage of price differences of the same commodity, trading on different exchanges. Arbitrage trading may also refer to trading on price differences between physical commodity and the commodity futures.
What is Hedging?A hedge is just a way of insuring an investment against risk. Hedger eliminates the price risk of physical material he owns by taking an offsetting position in futures market.
What are long positions?In simple terms, long position is a net bought position.
What are short positions?Short position is net sold position.
How is it possible to sell, when one doesn't own commodity?One doesn't need to have the physical commodity or own a contract for the commodity to enter into a sale contract in futures market. It is simply agreeing to sell the physical commodity at a later date or selling short. It is possible to repurchase the contract before the maturity, thereby dispensing with delivery of goods.
What is stop loss (SL)?Stop loss is an order to limit an investor's loss on the position he holds. By placing a Stop Order, Investor actually set a loss level which investor is willing to undertake. A stop loss order is an order which will be visible to the market only when it satisfies the business conditions for buy and sell. It is used as a tool to limit the loss.
What is marked to market (MTM)?On the day of entering into the contract, it is the difference of the entry value and closing price for that day. In case of carry forward position, MTM is the difference of the market price less yesterday’s closing price.
What is Margin?Margin is deposit money which is required in advance to execute trades on the exchanges.
What is Initial Margin?Initial Margin is the amount of money deposited by both buyers and sellers of futures contract to ensure the performance of trades executed.
What is Maintenance Margin?Maintenance margin is an amount over and above the initial margin to ensure that the balance in the margin account never becomes negative.
What is Additional Margin?Additional margin is an amount imposed to remove unexpected volatility from the market.
What is bull spread (futures)?In most commodities and financial derivatives market, the term refers to buying contracts maturing in nearby month, and selling the deferred month contracts, to profit from the wide spread which is larger than the cost of carry.
What is bear spread (futures)?In most of commodities and financial derivatives market, the term refers to selling the nearby contract month, and buying the distant contract, to profit from saving in the cost of carry.
Is there any limit to which, price of a commodity can rise or fall in a day?Yes, there are circuit limits or daily price range (DPR) to safeguard the interests of general investors from the extreme volatilities in markets for preventing any unexpected fall or rise beyond a limit. When the circuit limit is hit, there is a cooling period of fifteen minutes after which the trading will begin again with fresh circuit limits.
What are the risk factors?Commodity trading is done in the form of futures and that throws up a huge potential for profit and loss as it involves predictions of the future and hence uncertainty and risk. Risk factors in commodity trading are similar to futures trading in equity markets.A major difference is that the information availability on supply and demand cycles in commodity markets is not as robust and controlled as the equity market.
What are the factors that influence the commodity prices in the market?The commodity market is driven by demand and supply factors and inventory, when it comes to perishable commodities such as agricultural products and high demand products such as crude oil. Like any market, the demand-supply equation influences the prices.Variables like weather, social changes, government policies and global factors influence the balance.
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National Commodity & Derivative Exchange Limited (NCDEX) |
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