All about commodity markets

Commodities market, commodities trading, commodity futures. . . These terms are not very
commonly understood by many. However, commodity markets offer as much an opportunity to investors as does the stock market. What is the commodity market? Commodity market is a place where trading in commodities takes place. It is similar to an equity market, but instead of buying or selling shares one buys or sells commodities. How old are the commodities market? The commodities markets are one of the oldest prevailing markets in the human history. In fact, derivatives trading started off in commodities with the earliest records being traced back to the 17th century when rice futures were traded in Japan. What are the different types of commodities that are traded in these markets? World-over one will find that a market exists for almost all the commodities known to us. These commodities can be broadly classified into the following:

Precious Metals: Gold, Silver, Platinum, etc. Other Metals: Nickel, Aluminium, Copper, etc. Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc. Soft Commodities: Coffee, Cocoa, Sugar, etc. Live-Stock: Live Cattle, Pork Bellies, etc. Energy: Crude Oil, Natural Gas, Gasoline, etc.

What are the different segments in the commodities market? The commodities market exists in two distinct forms, namely, the Over the Counter (OTC) market and the exchange-based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over-the-counter markets and the participation is restricted to people who are involved with that commodity, say, the farmer, processor, wholesaler, etc. A majority of the derivative trading takes place through exchange-based markets with standardised contracts, settlements, etc. What are the characteristics of Over the Counter (OTC) commodity markets? The OTC markets are essentially spot markets and are localised for specific commodities. Almost all the trading that takes place in these markets is delivery based. The buyers as well as the sellers have their set of brokers who negotiate the prices for them. This can be illustrated with the help of the following example:

A farmer, who produces castor, wishing to sell his produce would go to the local 'mandi.' There he would contact his broker who would in turn contact the brokers representing the buyers. The buyers in this case would be wholesalers or refiners. In event of a deal taking place, the goods and the money would be exchanged directly between the buyer and the seller. Thus, it can be seen that this market is restricted to only those people who are directly involved with the commodity. In addition to the spot transactions, forward deals also take place in these markets. However, they too happen on a delivery basis and hence are restricted to the participants in the spot markets. What are the characteristics of the Exchange Traded markets? The exchange-traded markets are essentially only derivative markets and are similar to equity derivatives in their working. That is, everything is standardised and a person can purchase a contract by paying only a percentage of the contract value. A person can also go short on these exchanges. Also, even though there is a provision for delivery most of the contracts are squared-off before expiry and are settled in cash. As a result, one can see an active participation by people who are not associated with the commodity. Do the commodity exchanges facilitate delivery? The commodity exchanges do facilitate delivery, although it has been observed world-over that only 2 per cent of all the trades result in actual delivery. Why is the percentage of delivery ratio very low in the exchange-based commodity derivatives? Many people who participate in the exchanges are those who are not involved with the physical trading of the commodity. Thus they would not like receiving delivery and would not be in a position to give delivery. Standardised contracts make an unfeasible proposition for any trader to give or take delivery. E.g. if the size of 1 soya contract is 10 MT, a trader cannot buy / sell 15 MT of soya through the exchange. Also one cannot avail a credit facility in the exchanges that may be available in the local market. These and other factors deter a person from giving / receiving delivery through the exchanges. What is the size of the commodities market as compared to the equity market? In the developed markets the volumes on the exchange-based commodity derivates markets are about five times more than that of the equity markets. What is the history of commodities markets in India India, being an agro-based economy, has markets for most of the agro-based commodities. India is the largest consumer of gold in the world, which implies a huge market for the yellow

metal. India has huge spot markets for all these commodities. For instance,. Indore has a huge market for soya, Ahmadabad for castor seeds and Surendra nagar for cotton, etc. During the pre-Independence era, India also had a thriving futures market for commodities such as gold, silver, cotton, edible oils, etc. In mid-1960s, due to wars, natural calamities and the consequent shortages, a future trading in most commodities was banned. Currently, the futures markets that exist in India are localised for specific commodities. For example, Kerala has an exchange for pepper; Ahmadabad for castor seeds, and Mumbai is the major centre for gold, etc. These exchanges, however, have only a regional presence and are dominated by people who are involved with the physical trade of that commodity. What are the current developments in this market? The government has now allowed national commodity exchanges, similar to the Bombay Stock Exchange and the National Stock Exchange, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order-driven, screen-based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges. Consequently four commodity exchanges have been approved to commence business in this regard. They are:

Multi Commodity Exchange of India Ltd (MCX), located at Mumbai National Commodity and Derivatives Exchange Ltd (NCDEX), located at Mumbai National Board of Trade (NBOT), located at Indore National Multi Commodity Exchange (NMCE), located at Ahmadabad.

What is the need for the exchange-traded commodity derivatives market? The biggest advantage of having an exchange-based platform is reach. A wider reach ensures greater participation, which results into a more efficient price discovery mechanism. In fact, it comes to a stage where the derivative market guides the spot market in terms of pricing. This can be well understood by looking at the following example: Imagine a soy wholesaler in Madhya Pradesh who -- having bought the crop from the farmer -wishes to sell it to the oil refiners. To sell his crop he has to go to the local market at Indore. The price that he will get for his crop would be solely dependent upon the demand supply condition prevailing at that point of time at that market place. Also as the number of players is less there are chances of the prices being biased? In contrast the prices in the futures market are determined not only by the local demand supply conditions but also by the global scenario. Add to that the view taken on a commodity by various sets of people depending upon different parameters such as technical analysis, political news, exchange rates, etc. The price that is thus quoted can be safely regarded as the most efficient price. Thus, looking at the futures price the trader can price his crop appropriately.

What opportunities do the commodity derivatives provide for investors? Futures contract in the commodities market, similar to equity derivatives segment, will facilitate the activities of speculation, hedging and arbitrage to all class of investors. Speculation: It facilitates speculation by providing opportunity to people, although not involved with the commodity, to trade on the views in the movement of commodity prices. The speculative position is taken with a small margin amount that is paid to the exchange, and the contract can be squared-off anytime during the trading hours. Hedging: For the people associated with the commodities the futures market can provide an effective hedging mechanism against price movements. For example an oil-seed farmer may go short in oil-seed futures, thus 'locking' his sale price and in the process hedging against any adverse price movements. On the other hand a processor of oil seeds may buy oil-seed futures and thus assure him a supply of oil-seeds at a pre-determined price. Similarly the oil-seed processor may go short in oil futures, which may be bought by a wholesaler of oil. Also, there is a saying that 'gold shines when everything fails.' Thus, gold can be used as a hedging tool against other investments. Arbitrage: Traders may exploit arbitrage opportunities that arise on account of different prices between the two exchanges or between different maturities in the same underlying. Why to invest in commodity mkt

You may have your debt and equity funds in place, but investing in commodities could just be
the one element to improve your portfolio. Commodity trading provides an ideal asset allocation, also helps you hedge against inflation and buy a piece of global demand growth. In 2003, the ban on commodity trading was lifted after 40 years in India .Now, more and more people are interested in investing in this new asset class. While price fluctuations in the sector could get rather volatile depending on the category, returns are relatively higher. However, as this is not a primary area of investment for most, there is a lot of apprehension about when and how to invest. Outlook Money seeks to answer some of these questions and help you assess a whole new turf for making money. Why invest in commodities?

Commodities allow a portfolio to improve overall return at the same level of risk. Ibbotson Associates, a leading US-based authority on asset allocation estimates that commodities increased returns between 133 and 188 basis points, at no extra risk. Who should invest? Any investor who wants to take advantage of price movements and wishes to diversify his portfolio can invest in commodities. However, retail and small investors should be careful while investing in commodities as the swings are volatile and lack of knowledge may result in loss of wealth. Investors must understand the demand cycles those commodities go through and should have a view on what factors may affect this. Ideally, you should invest in select commodities that you can analyse rather than speculate across products you have no idea about. Investing in commodities should be undertaken as a kicker in your portfolio and not as the first destination for your money. What is commodity trading? It's an age-old phenomenon. Modern markets came up in the late 18th century, when farming began to be modernised. Though the trade's mechanisms have changed, the basics are still the same. In common parlance, commodities means all types of products. However, the Foreign Currency Regulation Act (FCRA) defines them as 'every kind of movable property other than actionable claims, money and securities.' Commodity trading is nothing but trading in commodity spot and derivatives (futures). If you are keen on taking a buy or sell position based on the future performance of agricultural commodities or commodities like gold, silver, metals, or crude, then you could do so by trading in commodity derivatives. Commodity derivatives are traded on the National Commodity and Derivative Exchange (NCDEX) and the Multi-Commodity Exchange (MCX). Gold, silver, agri-commodities including grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities that these exchanges deal in. Trading in commodities futures is quite similar to equity futures trading. You could take a long position (where you buy a contract) or a short position (where you sell it). Simply speaking, like in equity and other markets, if you think prices are on their way up, you take a long position and when prices are headed south you opt for a short position. How big is the Indian commodity trading market as compared to other Asian markets? The commodity market in India clocks a daily average turnover of Rs 12,000-15,000 crore (Rs 120-150 billion). The accumulative commodities derivatives trade value is estimated to have reached the equivalent of 66 per cent of the gross domestic product and the future will only see the percentage rising, says ICICI direct.com vice-president Kedar Deshpande.

What do you need to start trading? Like equity markets, you have to fulfil the 'know your customer' norms with a commodity broker. A photo identification, PAN and proof of address are essential for registration. You will also have to sign the necessary agreements with the broker. Is there a regulator for the commodity trading market? The Forward Markets Commission is the regulatory body for the commodity market in India. It is the equivalent of the Securities and Exchange Board of India (Sebi), which protects the interests of investors in securities. What kind of products can be listed on the commodity market? All commodities produced in the agriculture, mineral and fossil sectors have been sanctioned for futures trading. These include cereals, pulses, ginned cotton, un-ginned cotton, oilseeds, oils, jute, jute products, sugar, gur, potatoes, onions, coffee, tea, petrochemicals, and bullion, among others. What are the risk factors? Commodity trading is done in the form of futures and that throws up a huge potential for profit and loss as it involves predictions of the future and hence uncertainty and risk. Risk factors in commodity trading are similar to futures trading in equity markets. A major difference is that the information availability on supply and demand cycles in commodity markets is not as robust and controlled as the equity market. What are the factors that influence the commodity prices in the market? The commodity market is driven by demand and supply factors and inventory, when it comes to perishable commodities such as agricultural products and high demand products such as crude oil. Like any market, the demand-supply equation influences the prices. Variables like weather, social changes, government policies and global factors influence the balance. What is the difference between directional trading and day trading? The key difference between commodity markets and stock markets is the nature of products traded. Agricultural produce is unpredictable and seasonal. During harvesting season, the prices of these commodities is low as supply goes up. There are traders who use these patterns to trade in the commodity market, and this is termed directional trading. Day trading in commodity markets is no different from day trading in the equity market, where positions are bought in the morning and squared off by the end of the day. Does commodity speculation affect agricultural income in India?

The vision for the commodity market in India is to reduce information asymmetry and make a robust market available to the end producer or farmer. It is also expected to balance out price information and give the producer a better price and a platform to hedge. The futures market will allow the farmer to see the upside of the price over two to three months and help him decide where to sell. How to keep updated? Most commodity trading firms have a research team in place that prepares commodity charts and conducts detailed study on the trends of the commodity in question. Investing strategies based on this research are usually provided to clients. They usually provide daily market reports before the market opens and intra-day calls during trading hours, along with monthly and weekly research reports.

Dummies guide to commodity trading

If you're new to the world of commodity trading, fear not, because using the platform in India
is not beyond anyone's grasp or capability -- it's only a matter of making a beginning somewhere. If you want to clarify some basic doubts but were afraid to ask, here's your chance to catch up on lost time. Below are some answers to some frequently popped questions. The basic difference between the commodity exchange and stock exchange is that in a commodity exchange, actual physical products that are non-financial in nature are traded. These include agricultural products such as wheat, castor, groundnut or sesame and industrial products such as aluminium, zinc, nickel and also precious metals like gold and silver. In comparison, a stock exchange offers all financial products such as stocks, indexes, interest rate, and government securities.

Trading in any contract month will open on the 21st day of the month, 3 months prior to the contract month. For example, the December 2004 contract opens on 21st September 2004. In commodities, the 20th day of the delivery month would be the due date. If the 20th happens to be a holiday then the due date would be the previous working day. Typically, the margins for trading vary from commodity to commodity. For a more liquid commodity like gold or silver the initial margin and the exposure margin would be typically 4 per cent each. However, in other commodities the margins could vary depending on volatility of the commodity prices. The pay-in (T+1) will be on or before 11.00 a.m., payout on or after 12.00 noon. All contracts settling in cash would be settled on the following day after the contract expiry date. Deliveries are not compulsory. The buyer and the seller would have to express their intentions while to give or take delivery entering the contract. The exchange would

match the deliveries at the client level. Contracts that are not assigned delivery are settled in cash. In case of physical delivery, a receipt from the warehouse where the goods are stored is issued in favour of the buyer, which is transferable. On producing this receipt the buyer can take the commodity from the warehouse. Where settlements go, for open positions at the beginning of the tendering period of the contract the buyer and the seller can give intentions for delivery. Intentions for delivery could be given right until the final day on which that the contract expires. Delivery would take place in electronic form (in the national level exchanges). All other positions would be settled in cash.

Any buyer would have to put in a request to take physical delivery to its depository participant, who would pass on the same to the warehouse manager. On a specified date, the buyer would have to go to the warehouse and pick up the physical delivery. The seller intending to make delivery would have to take the commodity to the designated warehouse. These commodities would have to be certified by an exchangespecified assayer.

The commodity that is meant for delivery would have to meet the contract specifications with a certain allowance for variances. If the commodity meets the specifications, the warehouse would accept it. Warehouses would further ensure that the receipt is updated in the depository system, giving the due credit in the electronic account. Also, every client who would want to give or take delivery would have to get registered as per the prevalent sales tax rates in his or her state.

Commodity Trading in India

Abstract: Commodity Trading in India started long time back, but the commodity trading in the country gained its' momentum after removal of certain restrictions by the Indian Government. Government's approval for setting up four national level commodity exchanges, which would involve multi-commodity trading, has further strengthened the commodity trading market of India. History of Commodity Trading in India The Commodity Trading Market of established itself in India as a dominant market form much before the 1970s. In fact, in the last phase of 1970s, the commodity trading market of India started to lose its' vibrancy. This happened because, from the late 1970s, numerous regulations and restrictions started to be introduced in the commodity market of India and these restrictions were acting as obstacles in the path of smooth functioning of the commodity trading market.

In the recent years, many restrictions, which were negatively affecting commodity trading market, have been removed. So, now the commodity trading market of India has again started to grow in a fast pace. In order to promote the commodity futures trading in India, Forward Markets Commission has been formed. This Forward Markets Commission actually regulates the futures trade in commodities. In India, there are 21 commodity exchanges, which enhance the efficiency and competitiveness of the commodity trading market. Many of these commodity exchanges are regional, while many of them are commodity specific. Some of these 21 commodity exchanges provide online commodity trading facility. Government Initiatives for promoting Commodity Trading

In the year 2003, the Indian Government approved the establishment plan of four commodity exchanges of national level. These national commodity exchanges would operate futures trading contracts for multiple commodities. The Indian Government has included more commodities in the list of permitted commodities, constructed under the Forward Contracts (Regulation) Act. Earlier there was a rule that every spot market transaction has to be completed within 11 days. In order to promote commodity trading, the Government of India has removed this restriction. Indian Government has removed NTSD (Non-Transferable Specific Delivery Contract) option from the Forward Contracts (Regulation) Act.

Significant points to considered on trading commodity

Commodities are the basic essential needs of people that include physical assets, natural resources, and products that you can touch, smell, taste and consumes on daily basis like wheat, corn, soybeans, oil, gold, silver etc. Due to increasing population and increasing demand, trading of commodity has increased in enormous amount and has made a tremendous economic impact on nations because commodities traded from years between several nations. Now as an investing point of view, commodities are best for trading because they have to remain usable for long periods and their price will always fluctuate with market. With the rise and fall of underlying commodity, the value of your investment will also rise and fall in direct proportion. So due to this more and more number of investors are trading commodities and earning huge profits but market is very much unstable and has changed drastically in recent years due to variations in demand and supply of commodities. To make profit out of commodity

you have to do constant monitoring of market in order to cope-up with the changes otherwise you could suffer a loss. Commodity trading initially developed to help agricultural producers and consumers to manage price risks associated with harvesting, marketing, and processing food crops. Commodities has wide spectrum of consumable goods and materials whose price are fluctuated on the basis of demand and supply factors, lower supply means higher prices and vice-versa. A commodity trading provides great financial opportunity but has high risk. As every individual has, their own unique approach of trading commodities and decisions generally based on fundamental or technical analysis, or combination of both. To initiate in commodity trading an individual requires large capital, good infrastructure along with good knowledge of trading. Commodity trading is also known as future trading system in which you handle the transactions through broker and you can generate large income with small effort. Now since there are several commodity units who lie in the same price range that are being purchase and sold at large quantities. Commodities also act as basic raw material used for the functioning of civilization. While making decisions in commodity trading the main thing that you have to keep in mind is to make a fundamental or technical analysis of trade although many traders use a combination of both. Fundamental analysis includes analysis of all the factors that influence supply and demand. For the commodities market, fundamental factors include weather and geopolitical events in producing countries outside forces that influence price action. Technical analysis is based strictly on inside market forces. It involves tracking various price patterns that occurred in the markets in the past. Technical analysis involves wide range of techniques, and a variety of market indicators studied including volume, open interest, momentum, and tools such as the MACD. Each individual analyst has his favourite approach - technical analysis is just as much art as it is science. There are certain essential points to consider while

trading commodity in order to get success Commodity works on agrees upon standard and executed without having any visual inspection. Your commodity trading must be standardized and industrial and agricultural commodities must be in a basic, raw and in unprocessed state. Commodity involves the risk of profit and loss as well so uncertainties will always there in the commodity trading. In order to initiate trading you should have in depth knowledge of commodities. Qualities of product, date of delivery and transportation methods are some of the important factors in commodity trading. Maintain Reputation and reliability in order to secure and to gain the trust of ancient investors, traders, and suppliers. Investing directly in specific commodity like gold and other precious metals can be risky so make investment after making good market analysis. There are four main types of commodities traded, which includes-: Energy commodities include crude oil, heating oil, natural gas, and gasoline. Metal commodities include gold, silver, platinum, and copper. Livestock and Meat commodities include lean hogs, pork bellies, live cattle, and feeder cattle. Agricultural commodities include corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar. Price levels of commodities fluctuate in very uncertain fashion, which involves very high levels of risks so before investing your money take a complete knowledge of basic working of commodity market. Moreover, if you are initiating trade then you should use only true risk capital to fund your commodity brokerage account. Nowadays online trading of commodity has started and there are several advantages of online trading of commodities but you must be careful in deciding that how much money you have to use as leverage to avoid losses because using large leverage in account would also land up in high losses. Through online trading of commodities trader has access to all the current information, commodity prices, and fast executions of commodity orders. Commodity trading is one of the most risky businesses, which involve large profit as well if

operated carefully. Weather patterns, natural disasters, epidemics and other manmade disasters are

Beginners of commodity trading in India

Beginners Guide to Commodities Futures Trading in India Indian markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, a commodity is the best option. Till some months ago, this wouldn't have made sense. For retail investors could have done very little to actually invest in commodities such as gold and silver -- or oilseeds in the futures market. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities. However, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks! Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of the commodities markets in India is also quite significant. Of the country's GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the sizes of the

commodities market grow many folds here on. Like any other market, the one for commodity futures plays a valuable role in information pooling and risk sharing. The market mediates between buyers and sellers of commodities, and facilitates decisions related to storage and consumption of commodities. In the process, they make the underlying market more liquid. Here's how a retail investor can get started: Where do I need to go to trade in commodity futures? You have three options - the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd. All three have electronic trading and settlement systems and a national presence. How do I choose my broker? Several already-established equity brokers have sought membership with NCDEX and MCX. The likes of Refco Sify Securities, SSKI (Sharekhan) and ICICI comm trade (ICICIdirect), ISJ Comdesk (ISJ Securities) and Sunidhi Consultancy are already offering commodity futures services. Some of them also offer trading through Internet just like the way they offer equities. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from. What is the minimum investment needed? You can have an amount as low as Rs 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract. While you can start off trading at Rs 5,000 with ISJ Commtrade other brokers have different packages for clients. For trading in bullion, that is, gold and silver, the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 65,00 for gold for one trading unit (10 gm) and about Rs 9,500 for silver (one kg). The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg,

quintals or tonnes), but again the minimum funds required to begin will be approximately Rs 5,000. Do I have to give delivery or settle in cash? You can do both. All the exchanges have both systems - cash and delivery mechanisms. The choice is yours. If you want your contract to be cash settled, you have to indicate at the time of placing the order that you don't intend to deliver the item. If you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract. What do I need to start trading in commodity futures? As of now you will need only one bank account. You will need a separate commodity demat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks. What are the other requirements at broker level? You will have to enter into a normal account agreements with the broker. These include the procedure of the Know Your Client format that exist in equity trading and terms of conditions of the exchanges and broker. Besides you will need to give you details such as PAN no., bank account no, etc. What are the brokerage and transaction charges? The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges. Where do I look for information on commodities? Daily financial newspapers carry spot prices and relevant news and articles on most

commodities. Besides, there are specialised magazines on agricultural commodities and metals available for subscription. Brokers also provide research and analysis support. But the information easiest to access is from websites. Though many websites are subscriptionbased, a few also offer information for free. You can surf the web and narrow down you search. Who is the regulator? The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator. The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating than stock exchanges. But this could change if retail participation in commodities grows substantially. Who are the players in commodity derivatives? The commodities market will have three broad categories of market participants apart from brokers and the exchange administration - hedgers, speculators and arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators. Hedgers are essentially players with an underlying risk in a commodity - they may be either producers or consumers who want to transfer the price-risk onto the market. Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer hedgers would want to do the opposite. For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes. In which commodities can I trade?

Though the government has essentially made almost all commodities eligible for futures trading, the nationwide exchanges have earmarked only a select few for starters. While the NMCE has most major agricultural commodities and metals under its fold, the NCDEX, has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for futures trading. Do I have to pay sales tax on all trades? Is registration mandatory? No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller's responsibility to collect and pay sales tax. The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number. What happens if there is any default? Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges. Are any additional margin/brokerage/charges imposed in case I want to take delivery of goods? Yes. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery. Is stamp duty levied in commodity contracts? What are the stamp duty rates? As of now, there is no stamp duty applicable for commodity futures that have contract notes generated in electronic form. However, in case of delivery, the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market. How much margin is applicable in the commodities market? As in stocks, in commodities also the margin is calculated by (value at risk) VaR system.

Normally it is between 5 per cent and 10 per cent of the contract value. The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market margin. The margin keeps changing depending on the change in price and volatility. Are there circuit filters? Yes the exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker. Business cycles Commodities follow both seasonal patterns and general business cycles like the one below:

Commodity prices during expansion In a period of strong expansion, consumer demand is high, unemployment low, and wages increase more than under normal circumstances. This increases inflation, which, in turn, tend to rise most commodity prices. In addition, high economic activity also means an increase in demand for commodities as many commodities are required as input to companies production. The increase in inflation requires the central bank to raise the interest rates, in order to prevent the economy from overheating. When the increase in the interest rates take place, the expansion reaches its peak before growth slows, since investments decline due to higher financing costs. With a lag of several months the higher real interest rates reduces the demand for commodities

which in turn leads to lower commodity prices. Commodity prices during recessions During recessions commodity prices are expected to behave corresponding: at the beginning of a recession, the demand for commodities are low, which reduces commodity prices. When the real interest rates have been cut by the central bank a few times, and a economic turn-over is in sight, commodity prices are expected to gain again. Seasonal patterns for raw materials/commodities Commodities follow a seasonal pattern in terms ouch supply, demand and prices some commodities more predictable then others. Below you find some common seasonal patterns for highly traded commodities:

Coffee: A trade in coffee can be done by selling the last week of May and hold until August, after a seasonal high in May. Crude oil: Tend to fall in the beginning of April, and then rally through mid-May. Reason: Still demand for heating oil and diesel fuel in northern USA, while many refineries shut down and switch operations during this time a year.

Gold: Often increase in price from mid-summer until beginning of September. Natural gas: Seasonally, natural gas prices go up from July to end of October. Reason: Summer air condition heats up natural gas. Soybeans: Mid-February to end of May tend to be a good season for soybeans. During the last 42 years, prices advance 4 times out of 5.