Commodity Trading System

Commodity trading in India

Indiawas a little slow in taking up this opportunity finally lifting the ban on commodity trading in the 2003 after 40 years of Indian independence. But the growth of commodity trading has been in leaps and bounds, probably to make up for the lost time, and has already crossed the 50lakh crore mark. An untapped market with a lot of potential, Indian commodities market grew at the rate of 51% betweenJanand Oct 2010. The demand for commodities inIndiais estimated to grow by 4 times in the next 5 years.



Reasons to invest in commodities

People invest in commodities for a number of reasons, some of which are given belowà

a)      it is an ideal opportunity for asset allocation

b)      protects you from inflation

c)      enables you to participate in the global demand growth

d)     helps you to increase your overall returns while maintaining the same risk level.



What is Commodity Trading?

FCRA or Foreign Currency Regulatory Act defines it as all kinds of properties which are movable other than actionable claims, securities and money. Simply put it means trading in commodity spots and commodity derivatives or futures.

Commodity derivatives like gold and silver, metals and crude oils, agro based derivatives like pulses, grains, oils and spices etc are traded at NCDEX or National Commodity and Derivative Exchange as well as atMCXor Multi Commodity Exchange.

Trading in commodity futures is similar to that of trading in equity futures wherein the investor takes a long position and sits on an investment made if he thinks that the prices of the same will go up. Alternately, when there is even a hint of the prices going down, he takes a short position and sells it off at whatever profit he can make. Keeping a commodity in spite of a clear indication of its prices going down results in an loss and should be avoided at all costs.



Different types of commodity trading

Commodity market inIndiais regulated by the Forward Markets Commission. The different types of commodity trading systems are à

a)      Spot Trading: generally carried out in wholesale markets, it involves any transaction where delivery takes place either immediately or within a very short period due to certain technical difficulties.

b)      Forwards Contract: This pertains to an agreement between two parties wherein they agree to exchange a particular commodity sometime in the future at the current prices prevailing in the market

c)      Futures Contract: Even though it is similar to the forwards contract, it is still standardized and transacted only through a futures exchange.

d)     Hedging: This is predominantly found in the agricultural sector wherein farmers insure themselves against a plausible poor harvest by buying a futures contract in the same commodity.



Size of the commodities market in India

Commodity trading primarily focuses on agro based products like grains, pulses etc, metals and crude oils, energy products etc and the commodity based industries contribute about 58% ofIndia’sGDP.  The turnover of various commodities acrossIndiaadds up to a staggering total of Rs. 1400 billion which is expected to grow manifold with the introduction of futures trading here.

Difference between directional trading and day trading

Directional trading in commodities occurs in cases of agricultural products which are generally seasonal as well as unpredictable in nature. In instances such as these, the prevalent pattern of the commodity traded is the determining factor. Whereas day trading happens when a particular commodity is purchased in the morning and sold off by evening.



Vision of Commodity trading in India

The commodity trading market inIndiaworks with a vision toà

a)      complete reduce the prevalent asymmetry in information and

b)      make a huge market available to farmers or end producers

These visions can be achieved byà

a)      bringing about a balance in the price information

b)      arranging for a better platform and price for the producer to hedge

This vision, once realized, will give more power to the farmers and end producers by letting them see the upside of the price and helping them to decide where to sell. This autonomy will in turn help in increasing commodity trading in India.