Futures Commodity Trading Market
The futures commodity trading market has been gaining momentum since quite a few years. Two years back, in the year 2007, the total volume of trade in the case of the futures market was Rs 36.54 lakh crore when compared to the Rs 34.84 lakh crore in the year 2006.
The largest and the most reputed regulatory bodies for the futures commodity trading has been considered to be the MCX or the Multi Commodity Exchange of India in the terms of the number of contracts as well as the total turn over volume. Various other commodity exchanges where commodity futures are traded are the National Commodity Derivates Exchange or the much commonly called NCDEX as well as the National Multi Commodity Exchange. Other than these 3 exchanges there are twenty two more commodity exchanges in India.
There are more than 90 commodities which are traded in the futures commodity market. These commodities include various agricultural commodities such as jute, gur, wheat, coffee, rice, etc.; various pulses such as chana, urad etc.; oilseeds such as groundnut and coconut oil, sesame seeds, sunflower oil; spices such as turmeric, chillies, pepper, metals such as aluminum, copper, tin; precious metals such as gold as well as silver; crude oil, natural gas, coal and many more.
Out of all the commodities which are traded in the futures commodity market the four major commodities which have the largest share in terms of trading are Gold, Silver, Guar Seed and Chana.
The commodity futures market are of great use to the producers, the investors as well as the traders since they can sell the futures of the commodity (selling a particular amount of the commodity on a particular date at a pre decided fixed price or a particular price) and make sure that they are protected against any sudden changes in the market price.
Commodity Derivatives Trading
The two main and the largest commodity derivatives exchanges are the CBOT and CME commodity derivatives exchanges as far as the entire world is concerned. As far as India is concerned the Commodity Derivative markets was first started in the year 1875 with trading in Cotton as the most important commodity. This was possible because of the initialization of the Cotton Trade Association. This was followed by oilseeds in 1900, raw jute and other jute products, wheat, bullion (Gold and silver) and many other products.
Commodity trading derivatives was initiated in order to protect the farmers of the country from getting low returns for their produced agricultural commodities because of the value of the crop going below the cost price. On a large number of agricultural commodities such as cotton, coffee, pepper, turmeric, rice, wheat and many more, varied Derivative contracts started getting offered.
To look at it, today, there are more than 100 different commodities with derivative contracts which are currently available to the masses for trading. And the trading of these commodities can take place at about 25 different commodity derivative exchanges which are present in India. Of all the commodity derivative exchanges the NCDEX or the National Commodity and Derivatives Exchange is considered to be the largest commodity derivatives exchange.
There was a time where Commodity derivatives were mainly developed for reducing the risk factor or risk management purposes. Although, these days the use of commodity derivatives is not limited to risk management and they are being commonly used by the masses as an investment tool.
Oil Commodity Trading
By tradition, commodity trading in petroleum product (oil) was a place where only the influential, super traders dared to venture. With barrels holding 42 gallons each and a minimum contract of 1,000 barrels, delivering oil was a job left to the professionals. However, the petroleum-trading site has undergone some drastic changes over recent years.
For decades oil prices were steady, then in the mid 1970s, the industry exploded. The advances in the technology as well as the political landscape have been the major factors which have resulted in to the uncertainty, lack of stability, shortages, and rising prices. Nearly 30 years later, prices have skyrocketed to more than $70 per barrel and the forecasters foresee that in mid to late 2007 when it is expected to experience a slight decline for the next two years.
However, there are no certainties when it comes to oil prices, but the large-scale sectors can reduce the risk by offering reasonable accurate projection. As demands continue to rise, country like India is also experiencing cultural and technological changes. The trend seems to be in an upswing movement with no indication of slowing down, reversing, or being reversible.
India is riding in on the coattails of its western neighbors with its technology and business methods and is emerging in the 21st century. This brings with, it an increased demand for energy, mainly oil based, so that office buildings, homes and manufacturing plants can be erected. Rural economy is getting a facelift in many areas as this movement brings with it an exponential growth, which, in turn, increases the demand.
Demand is not the only puzzle. As India’s purchasing power to obtain, those goods are increasing, other sectors growths are showing up as well. India has a wealth of inexpensive, highly educated work force that is being sought out for outsourcing of Information, Technology, electronics manufacturing, communications and more. This continues to grow and expand for at least another decade.
This time the marketplace can offer even the average investor a favorable reward and risk balance in oil commodity trading.
Commodities Traded In India
There are many origins of the word ‘commodity’. The earliest version was the French word ‘commodité’. The English version was derived from it in the 15th century. It is synonymous to ‘convenience’ when we talk about the grade of services and also the quality.. The German root for commodities is ‘die Ware’, i.e. products that are offered for buying in the open market. A commodity is a thing which people need and is available without much differentiation throughout a given market.
The prices of commodities are generally determined according to their performance in a given market. The commodities that people generally deal in are the ones that are traded in every market all over the globe. In India too the commodities traded are the usual ones that are traded in other countries.
These include basic resources like such as iron ore, crude oil, coal, ethanol and agricultural products like sugar, soybeans, cotton, rice, cocoa, wheat, corn, soybean oil, pepper and precious metals like gold, platinum, palladium, silver; industrial metals like nickel, aluminum, zinc, tin, copper, aluminum alloy, recycled steel; rare metals like germanium, cadmium, cobalt, chromium, magnesium, manganese, molybdenum, silicon, rhodium, selenium, titanium, vanadium, wolframite, niobium, lithium, indium, gallium, tantalum, tellurium, beryllium and even cattle, heating oil, propane, uranium, rubber, palm oil etc.
Such a wide range of goods and materials appears too large, that is why people who trade in commodities on a large scale are generally found to be dealing with only the standard commodities like crude oil, natural gas, gold, silver, copper, etc.
Gold Commodity Trading
Since the demand for Gold is associated with the production of jewelry, Gold prices tend to increase during those periods when the demand for jewelry is the greatest the price of gold depends on a host of factors, which makes it very difficult to predict. In a fashion, gold is similar to shares. In fact, in many of the villages and small towns of India, gold is preferred over bank deposits as a savings and investment instrument.
Until a year ago, to gain from price volatility, one would have to hoard and trade in gold physically. However, with the commodity futures market operating in full swing, one has the option of not stocking gold physically to gain from its price movements. Let us see how trading in futures is far better than the option of holding gold. Firstly, there are various costs associated with the process of physically stocking gold. The costs include the cost of the gold itself, the cost of carrying, cost of physical storage, finance cost, and the most important one, the safety element.
Supposedly, the cost of gold is Rs 6000 per 10 grams, with an investment of Rs 6 lacs; one can buy 1kg of gold. Now, suppose, three months later, when the price of gold is Rs 6,500 per 10 grams, the person decides by selling the gold makes a gross profit of Rs 50,000. To arrive at the net profit, one would have to deduct; the cost of storage in a bank, the cost of financing and transaction costs, including the sales taxes. To trade in gold futures, an individual has to go to a brokerage house and open a trading account. An initial deposit of Rs 50,000 to Rs 1 lacs is paid.
One can gain from a futures market even by having a view on the price of gold. This characteristic of gain is absent in the physical market for gold. If one believes that the spot price of gold is going to fall in the near future, all one needs to do is to sell gold futures.
Types Of Commodities
The commodities have been classified into various types, just for the sake of ease in trading, ease in research and making the trading process an even simpler process.
Energies: This is one of the most active sectors when it comes to trading. It includes the energy-producing resources like crude oil, fossil oil, heating oil, propane, natural gas, coal, etc. These being the most profitable and volatile commodities, the exchanges have set up a lower limit for their trading.
Metals: This category consists of the popular metals which are traded as commodities on the exchange. Thus most of the metals like iron, copper, zinc, aluminum, silver, gold etc are traded on the metals index.
Grains: The next most actively traded thing which belongs to the list of commodity types are grains. This includes sugar, soybeans, cotton, rice, cocoa, wheat, corn and the list can also include many other agricultural products. So this category includes the largest amount of commodities.
Softs: This type includes materials like coffee, hot chocolate, banana, refined sugar, cotton wool and orange juice as the name ‘softs’ suggests the non volatile nature of these commodities. But the most important commodity in this type is Coffee, Refined sugar and Hot chocolate Exchange or CSCE, and it takes up a bulk of the trading volume in this category.
Meat: Meat has always remained a popular commodity. This includes live cows, pork, poultry, etc. These are the least volatile among commodities.
Financials: The last but not the least type when it comes to commodities. This type is discussed mostly due to their being listed as merchandizes in place of actual goods as they are the commodities which have been named on same exchanges.