What is a commodity?

A commodity is a product having commercial value that can be produced, bought, sold, and consumed. It is normally a basic raw unprocessed state but products derived from primary sector and structured products are also traded at commodity exchanges. In India, the list includes precious metals, ferrous and non-ferrous metals, spices, pulses, plantation crops, sugar, and other soft commodities.

What is a 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

What are the different types of participants in commodity markets?

Broadly, the participants can be classified as hedgers, arbitragers, and speculators. In other words, manufacturers, traders, farmers, exporters, and investors are all participating in this market.

What are the different types of Commodities that are traded in these Markets ?

World-over one will find that a market exits 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, Aluminum, Copper etc. Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds, etc. Soft Commodities: Coffee, Cocoa, Sugar etc. Energy: Crude Oil, Natural Gas, Gasoline etc.

How is trading done in the commodity exchanges?

Commodity exchanges are based on the online trading system. It is an order-driven, transparent trading platform, which is reachable to the various participants through the internet, VSAT, and leased line modes operated by members or subbrokers spread across the country.

What is a derivative contract?

A derivative is a product whose value is derived from the value of one or more underlying variable or asset in a contractual manner. The underlying asset can be equity, foreign exchange, commodity or any other asset. The price of derivative is driven by the spot price.

How are futures prices determined?

Futures prices evolve from the interaction of bids and offers emanating from all over the country which converge on the trading floor. The bid and offer prices are based on the expectations of prices on the maturity date.

Is delivery mandatory in commodity futures contract trading?

The provision for delivery is made in the Byelaws of the Associations so as to ensure that the futures prices in commodities are in conformity with the underlying. Delivery is generally at the option of the sellers. However, provisions vary from Exchange to Exchange. Byelaws of some Associations give both the buyer and seller the right to demand/give delivery.

How is it possible to sell, when one doesn’t own commodity?

One doesn’t need to have the physical commodity or own a contract for the commodity to enter into a sale contract in futures market. It is simply agreeing to sell the physical commodity at a later date or selling short. It is possible to repurchase the contract before the maturity, thereby dispensing with delivery of goods.

What is long/short position?

Long position is a net bought position, whereas a short position is net sold position.

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