Commodities are of various types and include agricultural produce and natural resources such as timber, oil and metals, etc.
These can be produced, and more importantly, bought, sold, and consumed.
The place where commodities are traded i.e. bought and sold is called the commodity exchange.
But why would people buy and sell commodities, when there are so many investment options like shares and mutual funds?
Hey, that’s simple…the foremost reason is to diversify the portfolio. Do you recollect the old saying: “Don’t put all your eggs in the same basket”?
The second is transparency, due to the large participation by various players. Further, it is about the simple economics of demand and supply.
The more the demand for a commodity, the higher its price, and vice-versa.
So, given the online trading platform and the transparent policy, commodity markets attract wide participation.
The larger number of participants leads to fair price mechanism and, hence, the pricing of commodities tend to be more practical and less irrational. More importantly, it provides a platform for producers to hedge i.e. insure their positions according to movement of the prices of the commodity.
Wow! Seems interesting. So,when you refer to commodities, what kind of products are we actually talking about, which we can buy and sell on these exchanges?
There are actually several categories that come under commodities
Look at this, the list, though not comprehensive, is amazing!
> Bullion: Gold, Silver, Platinum
> Base Metals: Nickel, Tin, Copper, Zinc, Aluminum, Lead
> Ferrous Metals: Steel Long
> Cereals: Wheat, Maize, Barley, Rice, Basmati Rice,
> Spices: Pepper, Red Chilli, Jeera, Turmeric, Cardamom, etc
> Energy & Gas: Crude Oil, Natural Gas, Gasoline, Heating Oil, ATF
> Oil & Oil Seeds: Castor Seeds, Soy Bean, Refined Soy Oil, Crude Palm Oil, Groundnut Oil
> Fibre: Long Staple Cotton, Medium Staple Cotton
> Pulses: Chana, Urad, Yellow Peas, Tur
> Plantations: Rubber, Coffee
> Others: Guar Seed, Gur, Sugar, Cashew
Yes, that is really a long list. Where do I look for information on commodities?
Oh, plenty of avenues! On a daily basis, financial newspapers, such as BusinessLine carry spot prices, and relevant news and articles on most commodities. There are specialised magazines on agricultural commodities and metals available for subscription. The brokers also provide research and analysis support.
And let’s not forget that there is plenty of good quality, free, and easy to access information on various websites.
Hmm..ok…so an exchange is where we can buy and sell the commodities? Okay. But are these exchanges controlled or regulated in any fashion? Is it something that Securities Exchange Board of India (SEBI) does? I have seen that name in the newspapers a lot…
No and Yes.
That’s a strange answer! Can you explain?
Okay, here you go:
It is the Forward Markets Commission (FMC) which regulates the commodity market. However, in the Union Budget 2015-16, the Finance Minister announced the FMC’s merger with SEBI, to help streamline regulations and curb wild speculation in commodities markets. Therefore, once the merger takes place, SEBI will be the authority for commodity exchanges too.
Where is this commodity exchange located? In New Delhi, like all other headquarters are?
Well, you will be surprised to note that there are 24 commodity exchanges in India.There are three national-level commodity exchanges to trade in all permitted commodities which are more prevalent, and they are the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd.
All the three have electronic ‘trading and settlement’ systems and a national presence. In recent times, the exchanges have introduced mobile apps to give anytime, anywhere access to prices and other information.
Can you explain briefly each of these national exchanges?
Sure, they are:
The Multi Commodity Exchange of India Ltd, Mumbai (MCX) www.mcxindia.com
MCX is India’s first listed exchange that facilitates online trading, and clearing and settlement of commodity futures contracts, thereby providing a platform for risk management. A commodity futures contract is an agreement between two parties to buy or sell the commodity at a future date but at today's agreed price. The Exchange, which started operations in 2003, is headquartered in Mumbai. MCX offers trading in varied commodity futures contracts across segments including bullion, ferrous and non-ferrous metals, energy and agricultural commodities.
The National Commodity and Derivative Exchange, Mumbai (NCDEX) www.ncdex.com
NCDEX is an online commodity exchange based in Mumbai, and was incorporated in 2003. It is “agricultural products” focused and as of March 31, 2015, the Exchange offered trading in 26 commodities, which included 21 agricultural commodities, 2 bullion commodities, 2 metals and 1 commodity in energy & polymer sector!
National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE) www.nmce.com
NMCE was founded in 1999 and is headquartered in Ahmedabad. It operates an online exchange, and provides futures trading of various commodities, including oils and oil seeds that comprise castor seeds, copra, mustard seeds, soya bean oils, spices.
If I do get into commodity trading, will I be charged?
Of course, there are charges such as brokerage, service tax as per the rates applicable, exchange transaction charges and stamp duty as per State law.
I can’t wait to get started! What are the prerequisites for trading?
You have to be a resident Indian possessing a valid PAN card and saving bank account, that’s it. But one needs to understand crucial aspects such as trading, settlement, margins, delivery, futures, options, etc.
Happy trading!
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