Spend, Save and Invest Smartly
Since ancient times trading in commodities has been part and parcel of global history. One has heard of the barter system where goods and commodities were traded in exchange for other commodities based on necessity. If one commodity was in plenty in a particular area it was traded for another commodity which was scarce in that region. This led to a balance in all the necessary commodities in that region. The barter system led to the birth of commodity trading in India as in the World.
Commodity is basically a product which is interchangeable in commerce and can be traded on a commodity exchange. There is very little differentiation between a product from one producer and another. Gold is a commodity which is universally accepted and has similar features in all corners of the globe.24 karat gold is 24 carat gold in India as in all other places .Commodities may be classified into agri-commodities such as spices, soyabean, corn, cocoa and so on. Bullion and other metals may also be traded. Crude oil, natural gas, furnace oil as well as vegetable oils are also traded on commodity exchanges. Trade in commodities offer vast opportunity for traders, speculators and arbitrageurs to make vast profits. However traders need to be aware of the fundamental factors affecting commodity markets.
Commodity exchanges in India are basically electronic trading and settlement systems with a nationwide presence. A number of brokers are associated with these commodity exchanges who offer online trading in commodities. Electronic trading enables even retail investors to participate in the markets by purchasing small quantities of precious metals and other commodities and holding them in electronic form. The forward market commission (FMC) functions as a regulatory authority in the commodity market. The National Commodity and Derivative Exchange (NCDEX), Multi-Commodity Exchange (MCX) and National Multi Commodity Exchange (NMCE) are the commodity exchanges present in India.
In order to open a commodity account one needs to submit an address and an identification proof such as a copy of the voter’s card or the passport, a bank account statement, copy of the PAN card which form a part of the know your client (KYC) norms. This is similar to the opening of a demat account in the equity market. A trading account will have to be opened with National Spot Exchange Limited (NSEL) and a demat account with a depository such as National securities depository limited...A minimum amount of INR 5000 is sufficient to trade in most commodities. The brokerage charges are in the range of 0.1-0.3% of the contract value. Transaction charges are in the range of INR 5-10 per Lakh per contract. The brokerage varies based on the type of commodity. The brokerage may be as high as 1% of the contract value in case of delivery based transactions. The brokerage cannot exceed the maximum limits specified which is 2.5% of the contract value. Commodity transaction tax would be levied at INR 10 per Lakh. of commodity transacted. One has to register with a major commodity exchange to begin trading.
Commodity futures contract is an obligation to buy or sell a fixed quantity of a particular commodity at a certain time in the future at an agreed price. These contracts are standardized on an exchange based on quantity and size (1000 barrels of crude oil) or 1 Kg of gold at a fixed time period say 3 months forward at a fixed price .The type of commodity and the location of the delivery is fixed. This standardization enables trading on a commodity exchange. The commodities traded are delivered at the agreed price irrespective of changes in the market price of the commodity.
I would like to end this article disbanding the myth that commodity trading fuels inflation in the country. In India spiraling prices of food grains and other commodities fuels inflation It is widely believed that price manipulations in the commodity markets is the prime cause of this. Commodity trading actually helps in fair price discovery and the prevention of cartelization. A steel trader in India can see the International price of steel at London in real time on his terminal. This gives the trader an idea of the actual price of steel and enables fair pricing. Exchanges also provide price signals of commodity prices to farmers and policy makers through future trading in far month contracts.