Introduction to Commodity Market

What is “Commodity”?

Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”.

In current situation, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for commodity trading recognized under the FCRA. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes and onions, coffee and tea, rubber and spices. Etc.

What is a commodity exchange?

A commodity exchange is an association or a company or any other body corporate organizing futures trading in commodities for which license has been granted by regulating authority.

How Commodity market works?

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the warehouse. But some one trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil.

For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities.

Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages as follows:
I. Trading : – At this stage the following is the system implemented-
– Order receiving
– Execution
– Matching
– Reporting
– Surveillance
– Price limits
– Position limits

II. Clearing : – This stage has following system in place-
– Matching
– Registration
– Clearing
– Clearing limits
– Notation
– Margining
– Price limits
– Position limits
– Clearing house.

III. Settlement : – This stage has following system followed as follows-
– Marking to market
– Receipts and payments
– Reporting
– Delivery upon expiration or maturity.

Qualitative Analysis

Investment preferences: –

Most of the investors prefer least risky investment which gives higher returns. That is why majority (70% of sample) of people interested in investments other than Share and commodity market.

Very less number of people (only 7%) showed their interest in investment in commodity market. Main reason for this is lack of awareness and complete information about commodity market.

Commodity Exchanges: –

People who are interested in commodity investment showed more concern towards NCDEX; for its brand name and people think there might be surety of transaction at NCDEX.

Commodities: –

Bullion is most preferred commodity for investment. Because one can expect maximum returns from such investment due to rapidly increasing prices of bullion in market.

Advertisements: –

Commodity market Advertisements should be more informative. And it is the failure of commodity market’s advertisement campaign to attract people’s attention; as majority of people are not aware about commodity market.

Advertisements