Commodity

What are commodity futures?
 
Trading in commodity derivatives first started to protect farmers from the risk of the value of their crop going below the cost price of their produce. Derivative contracts were offered on various agricultural products like cotton, rice, coffee, wheat, pepper, etc. 

commodity futures contract is a contractual agreement between two parties to buy or sell a specified quantity and quality of commodity at a certain time in future at a certain price agreed at the time of entering into the contract on the commodity exchange. 

Expiry date for different contracts can vary from one contract to another. In commodity derivatives, a buyer and a seller agree upon a price where the buyer is obliged to buy the commodity and the seller is obliged to deliver the commodity on the pre - specified date and price.
 
Why trade in commodity futures?
 
Commodities are natural resources used in day to day life. Unlike financial futures; commodity futures do not carry the risk of investors going bankrupt or declaring losses. Commodities have upper and lower price bands. i.e. Beyond a certain price level commodity prices cannot fall as the producers will stop its production and commodity prices cannot raise beyond a certain price level as people will look for availability of substitutes.
Futures trading in commodities is transparent and facilitates fair price discovery on account of large scale participation of entities associated with different value chains and reflects views and expectations of wider section of people related to that commodity. This also provides effective platform for price risk management for all segments of players ranging from the producers, the traders, processors, exporters/importers and the end users of the commodity.

In commodity futures, it is necessary to distinguish between investment commodities and consumption commodities. An investment commodity is generally held for investment purposes whereas consumption commodities are held mainly for consumption purposes. Gold and Silver can be classified as investment commodities whereas oil and steel can be classified as consumption commodities.
 
Is commodity trading only available in India?
 
No, Commodity trading is not only available in India but is a very popular trading practiced all over the world also. Most of the developed and developing countries have their own commodity markets. The first commodity exchange was started in 1849 in United States. Even a communist country like china has 3 commodity exchanges. Commodity trading is a very popular concept in rest of the world also.
 
What are the advantages of commodity future trading?
 
The commodity derivatives market is a direct way to invest in commodities rather than investing in the companies that trade in those commodities.

For example, an investor can invest directly in a steel derivative rather than investing in the shares of SAIL. It is easier to forecast the price of commodities based on their demand and supply forecasts as compared to forecasting the price of the shares of a company -- which depend on many other factors than just the demand -- and supply of the products they manufacture and sell or trade in.

The basic advantage of commodity future trading is for hedgers and for users of that commodity. A farmer may hedge his upcoming harvest at higher prices in the commodities markets to avoid any downfall in the market price in future while an automobile company may hedge its copper requirement at lower prices to secure its supply against any price rise in future. For an investor, it is an alternate investment class.
 
What is the difference between commodity trading in cash and futures?
 

Commodity trading in cash refers to spot dealing in commodities where payments and delivery are made immediately. Futures trading in commodities refer to a contract where by delivery and payment will be made at a pre fixed future date or time. In cash trading, the entire payment is made while in futures trading only a small percentage of the entire contract value (margin) needs to be paid immediately.


Which commodities are available in commodity trading?
 
Following commodities are available in commodity trading: 
    1. Precious Metals: Gold, Silver Platinum

    1. Energy: Crude Oil, Natural Gas, Furnace Oil

    1. Base Metals: Aluminum, Copper, Nickel, Zinc, Lead, Steel ingots

  1. Agriculture:- Soybean, soya Oil, Chana, Palm Oil, Jeerra, Pepper, Turmeric, Chilli, Cardamon, Guar Gum, Guar Seed, Mentha Oil, RM seed, Sugar.

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