An introduction to commodities market

Stock market achieved a highest publicity level, every single citizen of India knows something about stock market but it is not the case with Commodities market. Many of you are away from commodity market because of various myths about it.

In India currently total 24 commodity exchanges are working of which 3 are national level exchanges and remaining 21 are working on regional level.

The commodity future contracts and the exchanges organizing trading of such contracts are regularized as per The Forward Contract (Regulation) Act, 1952 and the Rules frames there under. Future Market Commission (FMC) is the agency governing the rules and regulations of commodity market.

To trust on something you should know it thoroughly and commodities market is not an exception to the rule. Hence it is very much important to know the base of it i.e. “Commodity”

“Commodity includes all kinds of goods”
Thus all that can be considered as “Goods” will be considered as “Commodity” Hence now it is essential to know what is mean by goods…

The Forward Contract (Regulation) Act, 1952 (FCRA) defines goods in following words- “Goods means every kind of movable property other than actionable claims, money and securities”

Section 2(7) of The Sale of goods Act, 1930 defines goods as-
“Goods” means every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be served before sale or under the contract of sale”

Thus from the above two definitions it can be conclude that all the movable things other than money, actionable claims and securities are covered under commodity. (There is contradiction between two acts for inclusion of “security” under goods. I have excluded it from goods as FCRA is the governing act for the commodities exchange)

Now the equally important second definition is “Commodity exchange”
A commodity exchange is an association, or a company or any other body corporate organizing a future trading in commodities

The commodities as discussed above are traded in the commodities exchange in the form of future contracts and on the basis of demand and supply rates for the commodity are determined.

For each commodity three types of contracts can be entered in to on the basis of time. These are -
Near- contract for one month (Current month)
Next – contract for the month after near month (Next to current month)
Far – contract for third month

Thus at any point of time one can get exposure for maximum three months. Usually “Near” contract is the mot active contracts in terms of trades. It carries maximum risk and maximum price fluctuations.
Just like in share market, only members can deal on a commodity exchange and those who are not members can trade through members.
All features of derivative contracts (Shares) are available in the commodity future contract like mark to market, margin maintenance etc

Additionally future contracts on commodity exchange carry one special feature of delivery. If any member intends to take or give delivery of the traded commodity then he need to inform the exchange of his intention at the beginning of the tender period.

Tender period begins two weeks before the expiry of the contract. Such a delivery can be obtained from the warehouse maintained by the commodity exchange after settlement of the consideration among both the parties to the contract. After delivery purchaser becomes the owner of the goods. He may use the goods for his consumption or export or may sell in spot market or can be used for future contracts.
Thus commodity exchange provides good information to decide about which crop to grow for future as one gets sufficient time of three months for price fixation. It can be use to generate profit through hedging activity too.