Commodity Market definition
Trading in commodities dates thousands of years back to 4500-4000 BC. When human civilisation stabilised and farming and cultivation started, commodity trading in the form of barter trade of the surplus quantities got introduced. Over a period of time, common items such as clay tokens, seashells and eventually coinage came into play as medium of trade.
In simple terms, the definition of commodity markets is a market where commodity goods are traded in exchange for money. Practically, all tangible goods that are bought and sold in the common course of business are commodities. The commodity markets are often also referred to as a MANDI in a common man’s terms.
The institutionalisation of commodity trading is relatively a recent development when the commodity Exchanges were formed and started trading in commodities. First regulatory authority to standardise commodities and oversea trades was operational in late 19th century. These exchanges started providing services in the fields of improved transport, warehousing and financing which facilitated the expansion of commodity markets into interstate and international arena.
Commodities traded on the exchanges are broadly classified as soft commodities which are agricultural produce (rice, wheat, corn, soya, coffee, sugar etc.) & livestock (live & feeder cattle, pork etc.) and hard commodities which are natural resources (precious & base metals, Natural Gas, Crude etc.). Trading in commodities significantly impact the political fortunes which is evident in the outcry over shortages of necessities or environmental & health concerns over certain consumption habits.
- Spot Commodity Markets and Futures Commodity Markets
There are two types of commodity markets viz. Spot where the trade is settled in cash against the immediate delivery and is more prevalent in retail market and the other one is Derivative Market where the trade is undertaken through a future/options/swap contracts. Under these contracts, as the name suggest, transaction is completed at a future date. In practice, under Future Contracts, the physical delivery is rarely taken and hence the financial investor prefers these type of trades whereby he just participates in the profit/loss on contracted price verses spot on the specified date.
In India, spot commodity markets are unorganised often the local market associations / bodies such as the APMC, etc and are unregulated. The futures commodity markets are organised and regulated by the SEBI (earlier by the FMC) and facilitate trading in approved commodity futures contracts.
- Commodity Exchanges in India
In India, there are 2 commodity exchanges viz. MCX and NCDEX facilitating trades on spot and futures basis in agro, base & precious metals as well as fossil energy sources. Pure demand and supply dynamics determine the prices of the commodities in Spot Markets but with introduction of Futures Market, commodity trading is just similar to trading in equities which witness cyclical movements and traders initiating positions based on their biases and expectations of market trends.
While there are 2 popular commodity exchanges in India viz. the MCX and NCDEX, MCX forms a larger part of market with close to 90% market share. The MCX market timings are from 10 AM till 11.55 PM/ 11.30 PM.
- Commodities traded in India
Derivative contracts of different agricultural and non-agricultural commodities are traded in India. The most popular commodities traded are Gold, Silver, Crude Oil, etc and the complete list of commodities traded on MCX can be found on the about MCX article.
However, it is important to note and that is significantly different from equity markets is that even for the same commodity, there are multiple contracts for the same underlying commodity based on the quantity. The contracts with smaller quantity denominations traded on the commodity exchanges are referred to as the Mini contracts. This is done to lower the entry barrier for trading the underlying commodity. For instance there may be Silver Contract and a Silver Mini Contract.
- Commodity Brokers
For trading commodities on the commodity exchanges on either the MCX or the NCDEX, traders will need to open an account with a commodity broker registered with these exchanges. A list of the registered brokers can be found on the website of the exchanges.
SAMCO Commodities Limited, is one of India’s leading online commodity brokers which facilitates trading in commodities online at a Flat Fee of Rs. 20 per executed order irrespective of the size of the order traded.
Online Commodity Trading in Commodity Futures
If one desires to trade online commodity futures in India, an account with a commodity broker is a must. Some important factors under consideration for online commodity trading in India are as under
Settlement of Commodity Derivatives/Futures Contracts
Unlike equity derivatives which are only cash settled in India, commodity derivatives can be settled either in cash or physically via delivery. However due to the great hardship involved in the physical delivery process due to documentation, warehousing and transportation challenges, etc, most commodity derivatives contracts in India are cash settled.
Margins for trading commodities
3 kinds of margins are applicable while trading commodities in India on the MCX
- Commodity SPAN Margin
- Commodity Exposure Margin
- Additional Extreme Loss Margin or ELM Margin
- With Effect from 2016, an additional 1% ELM margin is also applicable on all commodities traded on the total value of the contract. The ELM Margin Requirements can also be calculated on the commodity margin calculator.
For a comprehensive list of margins applicable while trading commodities with SAMCO, check out the Commodity Margin Calculator. This commodity margin calculator details the margin requirements for trading different commodities on the MCX across different expiry dates, different contracts and different SAMCO product types viz NRML orders, Bracket Orders, Cover Orders and MIS orders.
Brokerage in online commodity trading
One of the biggest costs of commodity trading is brokerage. The general market practice as far as brokerage on commodity trades is concerned is on a turnover basis. Traditional brokers quote brokerages on percentage basis or brokerage per crore of turnover basis.
However, while trading commodities online with SAMCO, the commodity brokerage applicable is Rs. 20 or 0.02% whichever is lower. Calculate your commodity trading brokerage on the SAMCO Commodity Brokerage Calculator.
Other costs and charges in commodities trading in India
Brokerage is not the only cost applicable while trading commodities in India. The complete list of charges for trading commodities can be found on the SAMCO Commodities Charges List.
The other costs of trading include
- CTT – Commodity Transaction Tax – Applicable only on Non-Agri Commodities
- Exchange Transaction Charges by MCX and NCDEX
- Service Tax on Brokerage and Exchange Transaction Charges
- Clearing Member charges
- Stamp Duty
The complete charges for trading can be calculated on the Commodity brokerage and charges calculator.
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