Commodity Trading System

Commodity trading in India

 

India was the bit slow in taking up this chance lastly raising the ban on commodity trading in the 2003 after 40 years of Indian freedom. But the development of commodity trading has been in extreme measures, probably to make up for the lost time, and has already crossed the 50 lac corer market cap.

Reasons to invest in commodities

 

People invest in commodities for a number of reasons, some of which are given below

1. it is an ideal opportunity for asset allocation
2. protects you from inflation
3. enables you to join in the global demand growth
4. helps you to increase your overall returns while maintaining the same risk level.

What is Commodity Trading?

 

FCRA or Foreign Currency Regulatory Act defines it as all types of properties which are portable other than actionable claims, securities and investments. Simply put it means trading in commodity spots and commodity derivatives or futures.

Commodity derivatives like gold and silver, metals and crude oils, agro based derivatives like pulses, grains, oils and spices etc are traded at NCDEX or National Commodity and Derivative Exchange as well as at MCX or Multi Commodity Exchange.

Trading in commodity futures is just like to that of trading in equity futures where in the trader takes a long position and sits on an investment made if he thinks that the prices of the same will go up.

At the same time, when there is even a hint of the prices going down, he takes a short position and sells it off at whatever profit he can make. Keeping a commodity in spite of a clear indication of its prices going down results in an loss and should be avoided at all costs.

Different types of commodity trading

 

Commodity market in India is regulated by the Forward Markets Commission. The different types of commodity trading systems are à

1. Spot Trading:
2. Forwards Contract:
3. Futures Contract
4. Hedging

Vision of Commodity trading in India The commodity trading market in India works with a vision to

1. Complete reduce the prevalent asymmetry in information and
2. Make a huge market available to farmers or end producers

These visions can be achieved by

1. Bringing about a balance in the price information
2. Arranging for a better platform and price for the producer to hedge

This vision, once realized, will give more power to the farmers and end producers by letting them see the upside of the price and helping them to decide where to sell. This autonomy will in turn help in increasing commodity trading in India.