Commodity Market

Commodities market can be included in the list of oldest markets in the entire human history. Just as we buy and sell shares of companies, one can buy and sell commodities.
The kinds of commodities being traded are:
"Agriculture-based commodities such as rice, wheat, sugar, etc.
"Mineral-based commodities such as gold, platinum, aluminium, copper, etc.
"Energy such as crude oil, electricity, etc.
In India 3 most prominent commodity exchanges are
"MCX "" Multi-Commodity Exchange of India
"NCDEX "" National Commodity and Derivative Exchange
"NMCE "" National Multi-Commodity Exchange of India
Trading in Commodities:
Main commodities permitted and traded on the exchanges are gold, silver, guar gum, guar seed, chana, jeera, chilly, mentha oil, crude oil, steel, soya oil, sugar, etc.
Trading timings:
Mon-Fri "" 10am to 5pm "" agro-based commodities
Mon-Fri "" 10am to 11:30pm "" precious/base metals and energy
Sat "" 10am to 2pm for all commodities
Spot trading:
In spot trading for commodities, trading, clearing and settlement is carried out on the spot. Spot trading is mostly carried out in regional mandis and unorganized markets. These markets are fragmented and isolated. The traders in the mandus are farmers, licensed traders, brokers and wholesale dealers. Mandi inspectors issue type and quantity certificates. Mandi fees include transaction fee and taxes varying between 4% and 12%.
Derivatives:
Two types of derivative contracts are:
1) Futures
A futures contract is an agreement between two parties to buy or sell a asset (commodity) at a pre-determined future date and at a pre-determined price.
2) Options
An options contract gives the holder the right to purchase or sell and asset (commodity) for a specified price, called an exercise/strike price, on or before a specified date.
Currently only futures are traded on the commodity exchanges in India. Option contracts are not permitted to be traded.
Futures contracts are valid for specified periods that are notified by the exchange. The exchange specifies the exact day and month on which futures contracts of a commodity begin and expire. Subject to exchange specification, one can sell/buy these contracts without having to give or take physical delivery as long as trade is settled before the expiry period.
Cash Settlement
In case of cash settlement, when the derivatives contract expires, the difference between the futures price and the price of the commodity on the date of the contract expiration "" called the settlement price, is settled by the exchange with the contract holder. If the futures buy price is higher than settlement price, the buyer has to pay the difference. However, if the settlement price is higher than futures buy price, the buyer is paid the difference.
In most cases one can square off futures position any time before the expiry of the contract. One needn"t hold onto his contract until expiry.
Physical Settlement
In this case, the contract holder would like to settle the contract by taking or giving delivery of the underlying commodity.
Participants who trade in commodity derivatives market can be classified under following three broad categories:
HEDGERS:
Hedging involves protecting oneself from an adverse price movement in the future.
For e.g. a person owns 1000gms of gold. Although he believes that gold is a good investment for the long run, he is a little worried about short term losses in the commodities. To protect from a fall in gold prices, he can sell a gold contract in the futures market. By doing this, he is selling gold at present prices. If gold prices tumble down, the losses that will occur on the gold commodities he is holding will be offset by gains in the gold contract sold in the futures market.
SPECULATORS:
Speculators make bets on where they believe the market is headed. These market participants bet on the future movements in the price of a commodity. Derivative futures give them leverage i.e. by putting in small amounts of money upfront, they can take large positions on the market.
ARBITRAGEURS:
Arbitrage means making profits by buying a commodity in one market and selling in another. This trading strategy generates a profit and requires no risk-bearing on the part of a trader. However, it makes a sense to enter into an arbitrage only if the cost of borrowed funds and the transaction costs of the commodity are low, because only then is arbitrage profit possible. Similarly, in case of an under-priced commodity, an arbitrager can buy commodity futures contract and sell the commodity in the cash/spot market.
Before a person enters into a contract, he needs to deposit a margin with his broker. Collecting margins helps the exchange manage risks of defaults in commodity trading.