COMMODITY MARKET AND ITS FEATURES

QUESTION : Explain the Commodity Market and its features.                       OR

            Write a note, on Commodity Market in India.

Ans. A) COMMODITY MARKET

When the value of derivative is derived from a commodity, it is known as commodity derivative. Commodity trading is one facility which investors can use for investing their funds. In India the commodity market facilitates multi commodity exchange within and outside the country. Commodity markets, particularly for agricultural commodities and primary products have been in existence for a long time all over the world. Initially goods were exchanged through cash transactions. The emergence of forward market provided a mechanism by which the prospects of future production and consumption were brought to bear. todays price in a logical way.

          In India the forward markets in commodities are regulated by Forward Markets Commission (FMC) which is a statutory body. FMC regulates forward markets in commodities through recognised associations. FMC helps to protect the interest of customers and non-members. In India, (at present) there are 22 commodity exchanges of which 3 are national level multi-commodity exchanges. These exchanges have been set up in the country to facilitate commodity trading for retail investors from anywhere in the country.

The three National exchanges in India are:—

1)    Multi Commodity Exchange (MCX), located at Mumbai.

2)    National Multi Commodity Exchange (NMCE), based at Ahmedabad.

3)    National Commodity And Derivatives Exchange (NCDEX), Mumbai based.

All the three commodity exchanges have electronic trading and settlement systems. The total value trading in commodity futures market has been increasing considerably in recent years amounting to. Rs. 50 lakh crores in 2008.

B.   AIMS OF COMMODITY EXCHANGE :-

The aim of commodity exchange is to provide a regulated forum for buyers and sellers of future contracts to meet and trade.

1)    The traders in commodity exchanges will help to raise liquidity of contracts by taking risks.

2)    They help to promote transparency in the discovery market prices for individual commodities

      based on their demand and supply.

3)    The traders in commodity exchanges carry out various hedging strategies and the commodity

      exchanges safeguard the customers against price fluctuations.

C.   FEATURES OF COMMODITY MARKETS :-

1)    Demat Account :-

The investor must have a demat account from NSDL (National Securities Depository Ltd.) to trade on NCDEX just like in stocks.

2)    Margin Requirements :-

In commodity market also margin is calculated by Value at Risk (VaR). Normally margin is between 5 to 10% of contract value: The margin keeps on changing depending on change in price and volatility.

3)    Agreement :-

The investor needs to enter into normal account agreement with the broker. This includes the procedure relating to 'know your client’ format that exist in equity trading.

4)    Circuit Filters :-

The exchanges have Circuit Filters. If the price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker.

5)    Brokerage And Transaction Charges :-

The broker charges range from 0.10 to 0.25% of contract value. Transaction charges range between Rs. 6 to 10 per lakh / per contract.

6)    Commodities For Trading :-

Mostly all commodities are eligible for future trading. For starters exchanges have listed a few commodities. The NMCE has most major agriculture commodities and metals under its fold. The NCDEX has a large number of agriculture, metals and energy commodities.. MCX offers many commodities for future trading.

7)    Delivery Of Commodities :-

During the delivery period of commodities the margin increases to 20 to 25% of contract value. The broker may levy extra charges.

8)    Commodity Market Regulator :-

Commodity exchanges are regulated by Forward Markets Commission. The brokers don’t have to register with the regulator.. FMC will seek to inspect the books of brokers only if bad policies are suspected.

9)    Information On Commodity Market :-

Daily financial newspapers carry spot prices and relevant news and articles on most commodities. There are many magazines on agriculture commodities available for subscription. Though many websites are subscription based, a few of them offer information free of cost.

10) Effect Of Default :-

The commodity exchanges have a penalty clause in case of any default by any member.