What is a 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.

What are commodity futures?

A commodity futures contract is an agreement between two parties to buy or sell the commodity at a future date at today`s future price. Futures contracts differ from forward contracts in the sense that they are standardized and exchange traded. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms standardized by the Exchange.

Who regulates the commodity market?

Just as SEBI regulates the stock market, Forward Markets Commission (FMC) regulates commodity market.

Which are the major commodity exchanges in India?

There are 24 commodity exchanges in India. There are three national level commodity exchanges to trade in all permitted commodities. They are:

A. Multi Commodity Exchange of India Ltd, Mumbai (MCX)

MCX is an independent and de-mutualised multi commodity exchange. MCX features amongst the world`s top three bullion exchanges and top four energy exchanges. Its key shareholders are Financial Technologies (I) Ltd., State Bank of India and it`s associates, National Bank for Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank, Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and SBI Life Insurance Co. Ltd.

B. National Commodity and Derivative Exchange, Mumbai (NCDEX)

A consortium of institutions promotes NCDEX. These include the ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).

C. National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)

It is the first de-mutualised electronic multi-commodity Exchange of India. Some of its key promoters are Central Warehousing Corporation (CWC), National Agricultural Co Operative Marketing Federation of India Limited (NAFED), Gujarat Agro Industries Corporation Limited (GAIC) and Punjab National Bank (PNB).

Why invest in commodities?

A. Transparency and Fair Price Discovery: Trading in commodity futures is transparent and a process of fair price discovery is ensured through large-scale participation. The large participation also reflects views and expectations of a wider section of people concerned with that commodity. Online Platform: Producers, traders and processors, exporters/importers get an online platform through MCX / NCDEX for price risk management.

B. Hedging: It provides a platform for producers to hedge their positions according to their exposure in physical commodity.

C. No Insider Trading: Dealing in commodities is free from the evils of insider trading. Besides, there are no company specific risks as those seen in stock markets.

D. Simple Economics: Commodity trading is about the simple economics of demand and supply. More the demand for a commodity higher is its price and vice versa.

E. Trade on Low Margin: Commodity Futures traders are required to deposit low margins, roughly 5 to 10% of the total value of the contract, much lower compared to other asset classes. The low margin, which again varies across exchanges and commodities, facilitates the taking of large positions at lower capital.

F. Seasonality Patterns: Quite often provide clue to both short and long term players.

G. No Counter party Risk: Much like the exchanges in the equity market, Commodity Futures market have Clearing Houses, which guarantee that the terms of the contracts are fulfilled, thereby eliminating the counter party risk.

H. Wide Participation: The emergence of online trading would enable growth in the commodity market, much akin to the one seen in the commodity market. It would also ensure bringing the market closer to both, the user and the trader.

I. Evolved Pricing: The rise in participation would decrease the risk of cartelisation, ensuring a holistic view on the commodity. Hence, pricing would be more practical and less irrational leading to Fair Price Discovery Mechanism.

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.