January 2014 31
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Eco Fundas for youEco Fundas for youEco Fundas for youEco Fundas for youEco Fundas for you
What is Commodity Trading?What is Commodity Trading?What is Commodity Trading?What is Commodity Trading?What is Commodity Trading?PROMOD JOSEPH
MBA, VIRGINIA TECH.
Any goods that are unbranded and are commonly
traded in the market are called commodities.
Globally, the commodity trade market is about three
times the size of equity trade market. In India, the commodities
market is still in a nascent stage and is going to be the next big
thing for investors. The expected growth rate of commodity
market is over 25 per cent annually over the next five years.
The volume of business of the country’s 24 commodity
exchanges, including three national exchanges, has, in the last
few years, run into several lakhs of crores of rupees per annum.
The main difference between a commodity exchange and stock
exchange is as follows: A commodity exchange deals in non-
financial commodities, be they agricultural commodities like
cotton and wheat, and non-agro commodities like aluminum,
and oil, whereas a stock exchange deals in financial products
like stocks and government securities.
Commodity markets are quite like equity markets. The
commodity market also has two constituents i.e. spot market
and derivative market. In case of a spot market, the
commodities are bought and sold for immediate delivery while
in the case of a commodities derivative market, various
financial instruments are traded on the exchanges.
Commodity future is a derivative instrument for the future
delivery of a commodity on a fixed date at a particular price.
For example, if an investor purchases a palm oil future, he is
entering into a contract to buy a fixed quantity of palm oil at a
future date. The future date is called the contract expiry date.
The fixed quantity is called the contract size. Such a contract
is called a Forward Contract. These futures can be bought
and sold on the commodity exchanges.
Futures Contract is a type of forward contract. Futures are
exchange-traded contracts to sell or buy physical commodities
for delivery on a specified future date at an agreed price. Futures
trading, which provide for greater transparency in prices, are
used generally for protection (hedging) against adverse price
fluctuations in basic commodities.
TTTTTypes of Commoditiesypes of Commoditiesypes of Commoditiesypes of Commoditiesypes of Commodities
The commodity exchanges facilitate an online platform for
trading on futures contracts in a wide range of
commodities, by following the best-global practices of
professionalism and transparency. The items traded on the
commodity exchanges include agricultural commodities like
wheat, rice, tea, jute, spices, soya, groundnut, coffee, rubber,
cotton; precious metals - gold and silver; base metals - iron
ore, lead, aluminium, nickel, zinc, etc., and energy commodities
- crude oil and coal. Over 100 commodities are traded in the
national exchanges.
The Forward Markets Commission (FMC) is the regulatory
body for commodity trading in futures / forward trade in India.
FMC, set up in 1953, has its headquarters in Mumbai and is
overseen by the Ministry of Consumer Affairs and Public
Distribution.
History of Commodity THistory of Commodity THistory of Commodity THistory of Commodity THistory of Commodity Trading in Indiarading in Indiarading in Indiarading in Indiarading in India
India has a long history of futures trading in commodities.
At one time, there were as many as 110 regional exchanges
conducting forward trade in various commodities. That was
the time, when the equity market was a poor cousin of this
market as there were not many companies whose shares could
be traded. However, in the late 1950s and early 1960s, India
saw a period of endemic shortages in many essential
commodities. This resulted in inflationary pressures on prices
of such commodities, which along with government regulations
in this area, resulted in the decline of this market since the
mid-1960s. Futures trading came to be prohibited in most of
the important commodities and many traders migrated to the
securities market.
The interest in commodity futures trading has revived since
early 1990s. Though the futures trading is not new to India as
32 January 2014
MBA Education & Careers
ECO FUNDAS FOR YOU What is Commodity Trading?
mentioned above, we have missed more than three decades
within which tremendous strides have been made in the field
worldwide.
Commodity ExchangCommodity ExchangCommodity ExchangCommodity ExchangCommodity Exchanges in Indiaes in Indiaes in Indiaes in Indiaes in India
There are 24 commodity exchanges in India, including three
national exchanges. The objective of establishing national
exchanges is to ensure that the commodity exchanges operate
at a national level, trade in all commodities with economies of
scale and adopt best practices in exchange management like
demutualisation (i.e., they are not owned or managed by
member brokers), automation, and settlement guarantee.
An individual, partnership firm, private limited company,
public limited company, co-operative societies are eligible to
become members of the following national exchanges subject
to the conditions for the membership.
(a) National Commodity & Derivatives ExchangeLimited (NCDEX) is an online multicommodity exchange
promoted by ICICI Bank, LIC, NABARD, and NSE. NCDEX,
the only commodity exchange in the country promoted by
national level institutions, is located in Mumbai and offers
facilities to its members in about 91 cities throughout India.
This is India’s biggest commodity exchange with a over 50
per cent share of the national commodities market.
(b) Multi Commodity Exchange (MCX), which started
operations in 2003, is promoted by Financial Technologies
(India) Ltd., SBI, NABARD, NSE, HDFC Bank, State Bank
of Indore, State Bank of Hyderabad, State Bank of Saurashtra,
SBI Life Insurance Co. Ltd., Union Bank of India, Bank of
India, Bank of Baroda, Canara Bank, and Corporation Bank.
It is headquartered in Mumbai.
(c) National Multi Commodity Exchange of India(NMCE) is unique as it is promoted by commodity-relevant
public institutions, viz., Central Warehousing Corporation
(CWC), National Agricultural Cooperative Marketing
Federation of India (NAFED), Gujarat Agro-Industries
Corporation Limited (GAICL), Gujarat State Agricultural
Marketing Board (GSAMB), National Institute of Agricultural
Marketing (NIAM), and Neptune Overseas Limited (NOL).
Commodity vs StocksCommodity vs StocksCommodity vs StocksCommodity vs StocksCommodity vs StocksWith stocks, you need to put up the full amount of the
stock value to buy the stock. With commodities, you
control commodity futures contracts with a margin deposit
which is usually between 5% - 10% of the value of the
commodity.
While there are thousands of stocks traded at an exchange,
the number of commodities are just over a hundred.
Stock prices often move slowly. Frequently, stock prices
may linger in a narrow trading range (sometimes for years)
causing your financial resources to be unproductively used.
Commodities frequently have fast price movement,
providing increased profit potential.
If you own stock, you get taxed twice. Once when the
company pays corporate tax on its earned income; and
again, when you pay personal taxes on dividends or capital
gains from your shares. The real tax can be very high.
With commodity profits, you are only taxed on your
income.
Stock is fictitious, there is no real basis for stock value other
than earnings. Stock can be “delisted” overnight and can
become worthless. Commodities have intrinsic value and will
always have value. People will always want grain and gold.
As the WTO looks at opening up the agricultural sector and
other commodity markets for global competition, India being
a major consumption market, will be an extremely attractive
market. Indian producers and traders will have growing
opportunity to be a part of the global market.
The author is Centre Director, T.I.M.E. Madurai.
MCX is the world's largest exchange insilver and gold futures, second largest incopper and natural gas futures, and the
third largest in crude oil futures.
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