How Commodity Trading Works?

Do you think that prices of gold will go up further or crude oil prices are going to fall? You can try entering the commodity futures market if you believe that these predictions have a good chance of coming true. Commodity markets have changed a lot since the age old time and today, fully computerized commodity exchanges – NCDEX and MCX have been set up. If you decide to buy gold today sell gold at a profit after some months then you have to be sure that the gold you buy is pure,  would also need a secure place to store and many more such hassles. Alternatively you can buy gold futures from commodities exchange if you want to invest in gold. Whenever you buy a gold futures contract, you will have to consider the following three points:

1.       Buy the amount of gold specified in contract.

2.       Buy it at the price specified in the contract.

3.       Sell it on the expiry of the contract. You don’t have to worry about actually buying the gold if you sell the gold futures contract before it expires.

We all know that stock futures prices or stock prices are quoted on a daily basis in the stock markets and it is the same way commodity futures prices are quoted on the commodity exchanges.

Margin - you just need to pay a fixed percentage of cost and not the entire amount while you buy a futures contract. Margins are much lower in commodities trading and thus it is cheaper as compared to stocks. You can analyze the commodities that are offered for trading, their contract size and other criteria by getting onto the commodities trading exchange – NCDEX and MCX

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Founded in 2005, ABans Group has grown from being a trading house to a dynamic and diversified business group. We provide expertise in Broking Services, Merchant Banking, Non-Banking Financial Dealings, Gold Refining and Realty and Infrastructure. In a nut shell Abans Group is a comprehensive Financial Services and Solution Provider, which aims to provide an end-to-end financial solution to all its clients.

Futures Trading Simplified

Now-a-days futures trading in commodity market is a booming business in India. Following are the technical terms of commodity futures trade explained in simple language:

1.       Cash Commodity–It is the actual physical commodity as distinguished from the futures contract based on the physical commodity.

2.       Settlement of Cash–According to a procedure specified in the contract, it is where the seller pays the buyer the cash value of the commodity traded.

3.       Carry Forward Position–This is the situation in which client carries his open positions to the next day.

4.       Arbitrage – Here similar commodities are on simultaneous purchase or sale in different contracts or in different exchanges of the same commodity in one exchange.

5.       Clearing Member – A non clearing member should settle all the trades through a clearing member.

6.       Day Trader – It is within a single trading session, a speculator will normally initiate and offset a position.

7.       Default–As per the exchange rules, it is the failure to perform on a futures contract.

8.       Derivative–It is traded on or off the exchange and its price is directly dependent upon the value of one or more underlying securities, equity indices, debt instruments or any agreed upon arrangement.

9.       Hedging–Hedgers take advantage of adverse price changes in the market and protect their businesses.

10.   Long – It is one who owns a cash commodity or has bought futures contracts.

11.   Price Discovery–The price level of commodity is determined on the basis of supply and demand factors.

12.   Short – One who has sold cash commodity or futures contracts.

13.   Speculator–One who anticipates future price movements and tries to profit from buying, selling future contracts.

14.   Trade Account – It is an account with the broking organization to trade in the futures market.

15.   Volatility – A measurement of the change in price over a given period of time.

16.   Warehouse Receipt – The client receives a Warehouse Receipt when the commodity sold in the futures market is taken the warehouse.

Founded in 2005, ABans Group has grown from being a trading house to a dynamic and diversified business group. We provide expertise in Broking Services, Merchant Banking, Non-Banking Financial Dealings, Gold Refining and Realty and Infrastructure. In a nut shell Abans Group is a comprehensive Financial Services and Solution Provider, which aims to provide an end-to-end financial solution to all its clients.

Commodity Futures Markets

India has a long history of commodity futures trading from more than 125 years. There are several commodity exchanges including Multi Commodity Exchange, the National Commodity and Derivatives Exchange and the National Multi Commodity Exchange. Following are the points that will help you to understand Commodity Futures Trading:

1.       The commodity exchanges and commodity futures contracts are regulated by the government under the Forward Contracts (Regulation) Act, 1952. Since Sept 2015 after FMC was merged with SEBI, SEBI is the regulator of Futures Market.

2.       A commodity includes several goods that are allowed for futures trading under the platform of the commodity exchanges recognized under the FCRA.

3.       A company or an association or any other body corporate organizing futures trading in commodities is termed as “Commodity Exchange”.

4.       Futures contracts is a standardized Forwards contract which is exchange traded and is legal agreement to buy or sell a particular commodity at a Specified future time. There are many types of Futures contracts.

5.       Speculators can benefit from changes in prices with respect to futures contracts that mostly offset before their maturity and therefore scarcely end in deliveries.

6.       Price risk management and price discovery are two major economic functions of a commodity futures market. Price risk management is the backbone of a commodity futuresmarket. The need for Hedging (Price Risk Management) arises from price risks in most commodities.

Founded in 2005, ABans Group has grown from being a trading house to a dynamic and diversified business group. We provide expertise in Broking Services, Merchant Banking, Non-Banking Financial Dealings, Gold Refining and Realty and Infrastructure. In a nut shell ABans Group is a comprehensive Financial Services and Solution Provider, which aims to provide an end-to-end financial solution to all its clients.

Information about Commodity Markets

A place where commodities are traded is a “Commodity Market”. This is one of the oldest prevailing markets in human history. Trading in commodity market is similar to equity market. Equities or shares are traded in Equity market and commodities or instruments backed by physical commodities are traded in the commodity market. These commodities are broadly classified into the following:

1.       Soft Commodities: Cocoa, Sugar, Coffee etc.

2.       Energy: Gasoline, Natural Gas, Crude Oil etc.

3.       Live Stock: Pork Bellies Live Cattle etc.

4.       Agro Based: Cotton, Oils, Corn, Wheat etc.

5.       Precious Metals: Platinum, Silver, Gold etc.

6.       Other Metals: Aluminum, Copper, Nickel etc.

Commodities market can be classified is in two distinct types – the exchange based market and the Over the Counter (OTC) market. The exchange traded markets are similar to equity derivatives in their working while OTC markets are localized for specific commodities. In the developed markets across the world, the volumes on equity markets are less than that of the exchange based commodity derivatives markets. Following are the approved commodity exchanges in India:

1.       Multi Commodity Exchange of India Ltd (MCX).

2.       National Commodity and Derivatives Exchange Ltd (NCDEX).

3.       National Board of Trade (NBOT).

4.       National Multi Commodity Exchange (NMCE).

Wider reach of exchange ensures greater participation and thus it provides more efficient price discovery mechanism. Futures contract facilitates the activities of arbitrage, speculation and hedging to all class of investors.

Founded in 2005, ABans Group has grown from being a trading house to a dynamic and diversified business group. We provide expertise in Broking Services, Merchant Banking, Non-Banking Financial Dealings, Gold Refining and Realty and Infrastructure. In a nut shell Abans Group is a comprehensive Financial Services and Solution Provider, which aims to provide an end-to-end financial solution to all its clients.