Commodity Trading

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What is Commodity T What is Commodity T
What is Commodity T What is Commodity T What is Commodity Trading? rading?
rading? rading? rading?
sold for immediate delivery while in the case of a
commodities derivative market, various financial
instruments are traded on the exchanges.
Commodity future is a derivative instrument for
the future delivery of a commodity on a fixed date
at a particular price. For example, if an investor
purchases a palm oil future, he is entering into a
contract to buy a fixed quantity of palm oil at a
future date. The future date is called the contract
expiry date. The fixed quantity is called the
contract size. Such a contract is called a Forward
Contract. These futures can be bought and sold
on the commodity exchanges.
Futures Contract is a type of forward contract.
Futures are exchange-traded contracts to sell
or buy physical commodities for delivery on
a specified future date at an agreed price.
Futures trading, which provide for greater
transparency in prices, are used generally for
protection (hedging) against adverse price
fluctuations in basic commodities.
T TT TTypes of Commodities ypes of Commodities ypes of Commodities ypes of Commodities ypes of Commodities
The commodity exchanges facilitate an online
platform for trading on futures contracts in a wide
range of commodities, by following the
best-global practices of professionalism and
transparency. The items traded on the commodity
exchanges include agricultural commodities like
wheat, rice, tea, jute, spices, soya, groundnut,
A
ny goods that are unbranded and are
commonly traded in the market are
called commodities. Globally, the
commodity trade market is about three times the
size of equity trade market. In India, the
commodities market is still in a nascent stage and
is going to be the next big thing for investors. The
expected growth rate of commodity market is over
25 per cent annually over the next five years. The
volume of business of the country’s 24 commodity
exchanges, including three national exchanges,
has, in the last few years, run into several lakhs of
crores of rupees per annum.
The main difference between a commodity
exchange and stock exchange is as follows: A
commodity exchange deals in non-financial
commodities, be they agricultural commodities
like cotton and wheat, and non-agro commodities
like aluminum, and oil, whereas a stock exchange
deals in financial products like stocks and
government securities.
Commodity markets are quite like equity markets.
The commodity market also has two constituents
i.e. spot market and derivative market. In case of
a spot market, the commodities are bought and
KRISHNA KUMAR
MBA, IIFT
Eco Fundas for you
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40 40 40 40 40 November 2008 November 2008 November 2008 November 2008 November 2008
ECO FUNDAS FOR YOU: WHAT IS COMMODITY TRADING?
coffee, rubber, cotton; precious metals - gold and
silver; base metals - iron ore, lead, aluminium,
nickel, zinc, etc., and energy commodities - crude
oil and coal. Over 100 commodities are traded in
the national exchanges.
The Forward Markets Commission (FMC) is the
regulatory body for commodity trading in futures
/ forward trade in India. FMC, set up in 1953, has
its headquarters in Mumbai and is overseen by
the Ministry of Consumer Affairs and Public
Distribution.
History of Commodity T History of Commodity T History of Commodity T History of Commodity T History of Commodity Trading in India rading in India rading in India rading in India rading in India
India has a long history of futures trading in
commodities. At one time, there were as many as
110 regional exchanges conducting forward trade
in various commodities. That was the time, when
the equity market was a poor cousin of this market
as there were not many companies whose shares
could be traded. However, in the late 1950s and
early 1960s, India saw a period of endemic
shortages in many essential commodities. This
resulted in inflationary pressures on prices of such
commodities, which along with government
regulations in this area, resulted in the decline of
this market since the mid-1960s. Futures trading
came to be prohibited in most of the important
commodities and many traders migrated to the
securities market.
The interest in commodity futures trading has
revived since early 1990s. Though the futures
trading is not new to India as mentioned above,
we have missed more than three decades within
which tremendous strides have been made in the
field worldwide.
Commodity Exchang Commodity Exchang Commodity Exchang Commodity Exchang Commodity Exchanges in India es in India es in India es in India es in India
There are 24 commodity exchanges in India,
including three national exchanges. The objective
of establishing national exchanges is to ensure that
the commodity exchanges operate at a national
level, trade in all commodities with economies of
scale and adopt best practices in exchange
management like demutualisation (i.e. they are not
owned or managed by member brokers),
automation, and settlement guarantee.
An individual, partnership firm, private limited
company, public limited company, co-operative
societies are eligible to become members of the
following national exchanges subject to the
conditions for the membership.
(a) National Commodity & Derivatives
Exchange Limited (NCDEX) is an online
multicommodity exchange promoted by
ICICI Bank, LIC, NABARD, and NSE.
NCDEX, the only commodity exchange in the
country promoted by national level
institutions, is located in Mumbai and offers
facilities to its members in about 91 cities
throughout India. This is India’s biggest
commodity exchange with a over 50 per cent
share of the national commodities market.
The National Commodity & Derivatives Exchange Limited (NCDEX)
is India’s largest commodity exchange
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November 2008 November 2008 November 2008 November 2008 November 2008 41 41 41 41 41
(b) Multi Commodity Exchange (MCX), which
started operations in 2003, is promoted by
Financial Technologies (India) Ltd., SBI,
NABARD, NSE, HDFC Bank, State Bank of
Indore, State Bank of Hyderabad, State Bank
of Saurashtra, SBI Life Insurance Co. Ltd.,
Union Bank of India, Bank of India, Bank of
Baroda, Canara Bank, and Corporation Bank.
It is headquartered in Mumbai.
(c) National Multi Commodity Exchange of
India (NMCE) is unique as it is promoted
by commodity-relevant public institutions,
viz., Central Warehousing Corporation
(CWC), National Agricultural Cooperative
Marketing Federation of India (NAFED),
Gujarat Agro-Industries Corporation Limited
(GAICL), Gujarat State Agricultural
Marketing Board (GSAMB), National
Institute of Agricultural Marketing (NIAM),
and Neptune Overseas Limited (NOL).
Commodity vs Stocks Commodity vs Stocks Commodity vs Stocks Commodity vs Stocks Commodity vs Stocks
o With stocks, you need to put up the full amount
of the stock value to buy the stock. With
commodities, you control commodity futures
contracts with a margin deposit which is
usually between 5%-10% of the value of the
commodity.
o While there are thousands of stocks traded at
an exchange, the number of commodities are
just over a hundred.
o Stock prices often move slowly. Frequently,
stock price may linger in a narrow trading
range (sometimes for years) causing your
financial resources to be unproductively used.
Commodities frequently have fast price
movement, providing increased profit
potential.
o If you own stock, you get taxed twice. Once
when the company pays corporate tax on its
earned income; and again, when you pay
personal taxes on dividends or capital gains
from your shares. The real tax can be very
high. With commodity profits, you are only
taxed on your income.
o Stock is fictitious, there is no real basis for
stock value other than earnings. Stock can be
“delisted” overnight and become worthless.
Commodities have intrinsic value and will
always have value. People will always want
grain and gold.
As the WTO looks at opening up the
agricultural sector and other commodity
markets for global competition, India being a
major consumption market, will be an
extremely attractive market. Indian producers
and traders will have growing opportunity to
be a part of the global market. M & C E
ECO FUNDAS FOR YOU: WHAT IS COMMODITY TRADING?
The author is Centre Director, T.I.M.E. Trivandrum.
The author has also pursued Senior Executive
Course in Global Strategic Management from
Manchester Business School.

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