Commodity FAQ

It is physical product that can be traded—bought, sold, produced or consumed. For example, gold is a commodity that is sold or purchased. Food grains, meanwhile, can be produced, sold, bought and purchased.

You trade commodities at the various Commodity Exchanges in the country.

This is the market place where you trade in Commodities. At present, commodities can be traded on three national-level exchanges in the country: Multi Commodity Exchange of India Ltd (MCX), National Commodity and Derivative Exchange (NCDEX) and National Multi Commodity Exchange of India Ltd (NMCE). There are also 21 smaller exchanges that offer commodities trading at the regional level

In the derivatives market, you are entering into an agreement to sell or buy at a future date at a certain price. This agreement cannot be verbal. It has to be a generally accepted document. A contract signifies this agreement. It specifies all details like the quantity, the date of transaction (in future), the price at which the commodities will be traded, the quality of the commodity and the delivery location.

When you enter an agreement to buy a commodity at a future date, it need not be a fixed agreement. You can choose to not buy at that date too, right? This is the key difference between a Futures and Options contract.

A Futures contract does not allow you to go back on the agreement. An Options contract does. When the date of transaction arrives, you can choose to ignore it if you purchased an Options contract. However, this rule only applies if you agree to Buy. Sellers cannot go back on their agreement.

Every Futures and Options contract is standardized on the commodity exchange. For example, the quantity denominations and delivery schedules are usually fixed or follow a fixed pattern. This is not so for Forwards contracts. They are exactly like Futures contracts, but without the standardized pattern. Forwards are not traded on the Exchange.

In market parlance, a long position is when you agree to buy in the future. For example, you buy a contract to ‘Buy’ copper one month down the line.

This is the opposite of a ‘long’ position. When you take a ‘short’ position, you agree to sell. Suppose you bought a contract to ‘Sell’ copper one month later, you are taking a short position.

Until 2015, trading on all the commodity exchanges In India was regulated by Forward Markets Commission (FMC). After that, it was merged with the Securities Exchange Board of India (SEBI). Since the merger, it is the securities market regulator SEBI that regulates commodities trading in the country.

At a stock exchange, the stocks bought and sold represent partial ownership in the company which originally issued the stock. At a futures exchange, contracts are bought and sold. The contracts are standardized as to quality, quantity and delivery time and location. The only variable is price, which is ‘discovered’ in trading on the exchange floor. The contracts represent the intent to accept or deliver a quantity of a commodity, for example, corn, soybeans, or Treasury bonds, at some future date.

A short position involves selling futures contracts or purchase of a cash commodity without offsetting an offsetting futures transaction. (A cash commodity is an actual, physical commodity someone is buying or selling, such as corn or soybeans, also referred to as actuals.) A long position involves buying futures contracts or owning the cash commodity.

A bull market is a period of rising market prices.

A bear market is a period of declining market prices.