Commodity - FAQs

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Future trading is known as trading of the future contract. The future contract purchaser possesses the right to buy commodity of similar quality, quantity in particular time period from seller of the contract.

The SEBI oversees and regulates the Indian commodity market.

  • Farmers/Investors
  • Investors
  • Exporters/Importers.
  • Agencies providing agricultural credit
  • Commodity financers
  • Large scale consumers like jewelers, refiners, textile mills
  • Arbitrageurs, Speculators, Hedgers
  • Corporate possessing risk exposure in the commodities

Investors have lot of choices when participating in commodity market. There are different types of metals like Gold, Silver, Copper, etc. Energy counters like Crude oil and Natural Gas are also traded. A number of agriculture commodities like Chana, Soybeans, Turmeric, Wheat etc are also available for trading.

In the market of derivatives, an individual only pays very small portion for the actual trade value. In this case, it is not required to pay for the whole sum upfront like the purchasing of stocks or the spot market. This is known as the Margin. More simply, the Margin is understood as the amount an individual is needed to deposit with the broker earlier to performing any kind of commodities trade on any type of exchange.

Each value of trades and contracts are often adjusted for reflecting the current price of market. This is known as Mark to Market (MTM). Also, the very day when an individual enters into the futures contract, MTM or Mark to Marketing is considered as the very difference between closing price of the day and the entry value. In the context of carried forward position or stature, it is considered as the difference between the market price of day and closing price of the earlier day

A hedge is considered as the investment mitigating the very risk of adverse movements of price of any asset. Commodity prices often keep on fluctuating. In order to hedge against such price risks, players are required to sell or buy positions in the futures markets of commodity. It is primarily the sellers/producers of the commodities for e.g., farmers’ producing wheat and the bulk buyers/consumers of the commodities (like the manufacturers of bread who utilize the wheat as raw material) that are undertaking hedging in various commodities.

Warehouse receipts are known as titled documents that are issued by the warehouses to the depositors against much deposited commodities. Through delivery and endorsements such documents are transferred. Such commodities can be claimed only by the receipt holders from warehouses.

When in Commodity Futures Market, an individual trades, that person possesses standardized contract. This means, every trade possesses certain common characteristics.

Such common quality is prescribed by Lot Size. The individual is thus responsible for trading in the multiples of such quantity or the lot.

However, delivery quantity can differ from the size of minimum lot. This is known as Delivery size.

Thus, for example, if the size of delivery was 200 gms and one lot for the commodity was 100 gms, then the individual requires for the trading at least in two lots for being eligible for the delivery

This is considered as the very opposite of Contango. This occurs when the futures price is lower than the commodity’s spot price therefore, backwardation opines that future expiration of contracts will be traded at higher price comparing to the expiration of contract.

This is considered as the difference between future prices of specific commodity over various tenures. For example, commodity’s future price may be Rs. 100 for the contract of 1 month and for 2 months contract Rs. 110. Such Rs 10 difference is known as Spread.

Commodity prices normally tend to respond to the expected trends in demand and supply. For agriculture commodities, seasonal patterns, weather conditions, stock levels in major mandies and arrivals also play a critical role in daily price variations. For commodities like Gold, Silver, Copper, Crude etc, global price movement in these commodities, cues from currency markets and the general global economic conditions shape up the price behaviour.

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