Commodity Futures in India

Commodity Futures
A commodity futures market in India has a prolonged history. Exponential growth is observed in commodity market after setting national level commodity exchanges. At present, there are 3 major national level commodity exchanges offering to trade in commodity futures. They are the Multi Commodity Exchange of India (MCX), National Multi Commodity Exchange of India (NMCE) and National Commodities and Derivatives Exchange (NCDEX). Among these exchanges, MCX is in the primary position with respect to the volume being traded.

Commodities are normally divided as Precious metals – silver and gold, Energy complex – crude oil and natural gas, Base metals – copper, nickel, zinc & zinc mini, lead & lead mini and aluminum and Agriculture commodities. With a number of agri-commodities are available through exchanges, the most active ones are chana, soybean, maize, turmeric, soy oil, rape mustard seed, crude palm oil, guar gum, wheat, cumin (jeera), guar seed, rubber, cotton, and castor.

MCX Commodity market
Trading in Commodity Futures
The commodity market timing commences at 9.00 am and extends till 11.55 pm Monday to Friday. However, trading times of different commodities vary from exchange to exchange.

The trading in commodities happens in either spot markets or futures markets. In spot markets, the commodity trade takes place immediately, in exchange for cash or other commodities. In futures markets, buyers & sellers trade a commodity based on a standardized contract. You don’t need to compulsorily make or accept deliveries of physical goods here. Trade in futures contracts happens electronically and therefore the contracts are often settled in cash.

What is Contract in Commodity Futures?
A commodity derivative instrument is an agreement to buy or sell a particular amount of a commodity at a set date in the future at a predetermined price. This contract specifies further details, just like the quality of the commodity and also the delivery location. An investor/trader can take a long position (buys a contract) or a short position (sells it). If the investor expects the worth of a commodity to rise, he takes an extended position. If he expects the value to fall, he opts for a short position.

What are the risk factors?
Commodity trading is done in the sort of futures which presents an enormous potential for profit and loss because it involves predictions of the future and hence uncertainty and risk. Risk factors in commodity trading are the same as futures trading in equity markets. A major difference between equity and commodity market is that the information available on Demand and Supply cycles in commodity markets isn’t as robust and controlled as the equity market.