Let us firstly understand the meaning of a commodity. A commodity is a product or an article which holds commercial value and one which can be traded across various markets. From a trading perspective, these commodities should have the same standard. Also, they can be classified into two categories namely, hard commodities and soft commodities. Metals like iron ore, copper, gold, silver; etc can be grouped into the former whereas commodities like rice, wheat; etc form a part of the latter.
Since, commodities trading is based on derivatives, let us understand some of the most commonly used derivatives. They are as follows:
Â· Forwards: It is an agreement between two parties to purchase or sell the underlying asset at a future date, based on todayâ€™s pre-agreed price
Â· Futures:It is an agreement between two parties to purchase or sell the underlying asset at a future date, based on todayâ€™s future price. The differentiating factor between forwards and futures contract is that the latter is standardized and it is exchange traded.
Â· Options: This consists of calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date. Puts give the buyer the right but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given future date.
Some other derivatives also include warrants, baskets and swaps.
There are two segments in which the commodities market functions.
Â· Over the Counter (OTC) market:It is predominantly a spot market and trading is delivery specific.
Â· Exchange Traded Market: It is a derivatives market where everything is standardized and a person who purchases the contract pays only a part of the contract value. There is a facility of taking physical delivery of the commodity but most contracts get squared off on the expiry date and are settled in cash.
When it comes to commodities derivatives, globally they are exchange traded and not OTC in nature. The Central Board of Trade (CBOT) and Chicago Mercantile Exchange (CME) are two of the oldest derivatives exchanges in the world. The former was established in 1848 with an endeavor to bring farmers and merchants together. Later, the CME was established in the year 1919.
Currently, in India commodities trading takes place on the below exchanges:
- National Commodity and Derivative Exchange (NCDEX)
- National Multi Commodity Exchange of India Ltd (NMCE)
- National Board of Trade (NBOT)
- Multi Commodity Exchange of India Ltd (MCX)
So now the question arises, how to invest in commodities market?
To get started with trading in the commodities market, you must first get your commodities demat account through a broker who is a member with the commodities exchanges. These exchanges have the list of brokers available with them. As far as the minimum investment amount is concerned, a person can get started with approximately Rs 6,000. This amount also varies with the type of commodity you choose to trade in. As a novice, you need to understand the dynamics of the market thoroughly. You need to be updated with the latest news and information in order to be a successful trader, hedger or a speculator in the market. Also, do not rely on random sources as far as commodity trading is concerned. You must refer to authentic sources like research reports, websites of exchanges; etc for the latest updates related to the commodity of your choice.
For trading purposes, registering yourself with a broker who has the membership of MCX/NCDEX is recommended. They are technologically driven trading exchanges. NCDEX is promoted by a consortium of institutions which includes LIC, NABARD, ICICI and NSE. NCDEX trading facilitates a fully automated screen-based trading for futures on commodities in India as well as a state of the art online monitoring and surveillance mechanism. Hence, one can experience online commodities trading at its best.It is run by an independent board of directors and promoters do not participate in the day to day activities of the exchange. It is a public limited company which was registered in Mumbai on 23rd April, 2003. The trade timings of the exchange are, from Monday to Friday 10:00 a.m. to 11:30 p.m. On Saturday trade takes place between 10.00 am to 2.00 pm. However, the exchange may vary the mentioned timings with due notice.
MCX is the worldâ€™s no 3 commodity futures exchange. MCX trading can take place from Monday to Friday between 10:00 a.m. to 11:30 p.m. Between November to March, every year, due to day light savings trade takes place upto 11.55 pm. On Saturday, trading takes place between 10.00 am to 2.00 pm. Futures trading in agri commodities can take place till 5:00 p.m. whereas non agri-commodities (bullions, metals, energy products) can take place till 11:30 pm / 11.55pm.
Kotak Commodity Services Ltd is a leading commodity broking firm offering commodity trading serviceâ€™s along with a research division specializing in fundamental and technical research.