Insight Into Commodity Markets

The commodities futures market in India is growing rapidly

. There are more than 80 commodities on which futures trading is allowed. Domestic institutional investors, foreign players and mutual funds, are, as of now, not allowed to trade in the $500 billion futures market. Commodity trading in India is gaining acceptance as a new investment asset class. With the coming of internet its the age of online commodity trading.

Commodity

A commodity is an undifferentiated product, which can be traded in a structured market (exchange platform) or bazaar in exchange for currency or another commodity. In a simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each producer are considered equivalent (by specification). Commodities can be categorized from the users/ processors perspective. For example:

Fibre crops: cotton, jute Plantation crops: tea, coffee, rubber

Other agricultural products: oilseeds, spices, pulses, wheat, rice. Soft produce: sugar, orange, mango Industrial products: crude oil, base metals, cement, iron ore, plastics, steel Precious metals: gold, silver, platinum

Commodity Market

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. In India, all agricultural produce is auctioned at the Agriculture Produce Market Committee (APMCs, commonly known as Mandis), where a farmer comes to sell his produce; a wholesaler or commission agent examines the quality and quotes a price for it. After some negotiation, a settlement is arrived at. Modern commodity market is traded online.

Types of Contracts in Commodities

Markets Derivative Contract:

A derivative contract is an agreement whose value is derived from the value of an underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, or stock. In general, examples of derivative instruments are forwards, futures, options and swaps/ spreads.

Currently, the government allows only forwards and futures trading in India.

Forward Trading Contract:

This is an agreement between two parties to buy or sell a commodity at a predetermined moment in the future. Forward trading is a bilateral and non-standardised contract specification.

Futures Trading Contract:

This is a refined forward contract between two parties to buy or sell a commodity, but contract specification, quality values and other things are standardised.

by: Aditiya Mehta

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