BEGINNERS GUIDE TO COMMODITY INVESTMENT

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INTRODUCTION TO COMMODITY MARKET

• Consumers and producers meet in the marketplace to buy and

sell commodities.

• Commodity market is a place where trading in commodities takes place

i.e, one buys or sells commodities.

• Demand and supply factors and related uncertainties determine the

mechanics of the commodity markets, and therefore of commodity

prices.

• Each commodity has its own, very distinct marketplace. The supply and

demand factors for wheat are very different from those for crude oil,

which in turn differ greatly from those for palladium.

• For investor purposes there are currently about 50 major commodity

markets worldwide that facilitate investment trade in nearly 100 primary

commodities.

• Commodities are split into two types: hard and soft commodities. Hard

Commodities are typically natural resources that must be mined or

extracted (gold, rubber, oil, etc.), whereas Soft Commodities are

agricultural products or livestock (corn, wheat, coffee, sugar,

soybeans, pork, etc.)

WHAT IS COMMODITY FUTURES ?

• A Commodity futures is an agreement between two parties to buy

or sell a specified and standardized quantity of a commodity at a

certain time in future at a price agreed upon at the time of entering into

the contract on the commodity futures exchange.

• The need for a futures market arises mainly due to the hedging function

that it can perform. Commodity markets, like any other financial

instrument, involve risk associated with frequent price volatility.

• Commodity market is an important constituent of the financial markets

of any country. This would help investors hedge their commodity risk,

take speculative positions in commodities and exploit arbitrage

opportunities in the market.

STRUCTURE OF COMMODITY MARKET

MINISTRY OF CONSUMER

AFFAIRS

FORWARD MARKET

COMMISSION (FMC)

COMMODITY EXCHANGE

NATIONAL EXCHANGE

NCDEX MCX NMCE

REGIONAL EXCHANGE

NBOT20 OTHER REGIONAL

EXCHANGES

HOW COMMODITY MARKET WORKS?

HOW TO TRADE IN COMMODITY FUTURES IN INDIA?

Trading in commodity market in India comprises of three simple steps.

Step One: Choosing a Broker

The broker you choose should be a member of the exchanges you wish to

trade in. Other than this, one should keep the following factors in mind while

choosing a broker:

• Competitive edge provided by the broker (commodity advisory,

commodity trading tips etc)

• Broker's knowledge of commodity markets

• Credibility of the broker

• Experience of the broker

• Net-worth of the broker

• Quality of broker's trading platforms

The relationship between the broker and the client is long-term. Thus

there must be a strong rapport, and mutual trust between the client

and the broker. Further, the client must communicate clearly to the

broker his needs and objectives for trading in commodities, whether

they are for the purpose of hedging, investment, etc. Further, your

objectives for entering the market provide you with a valuable

parameter to judge whether a broker fits your needs.

Step Two: Depositing the Margin

• To begin trading, the investor needs to deposit a margin with his

broker. Margin requirements are of two types, the initial margin and

the maintenance margin. These margin requirements vary across

commodities and exchanges but typically, the initial margin ranges from

5-10% of the contract value.

• The maintenance margin is usually lower than the initial margin. The

investor's position is marked to market daily and any profit or loss is adjusted

to his margin account. The investor has the option to withdraw any

extra funds from his margin account if his position generates a gain.

Also, if the account falls below the maintenance margin, a margin call

is generated from the broker and the investor needs to replenish his

account to the initial level.

Step Three: Access to Information and a Trading Plan

• As commodity futures are not long-term investments, their

performance needs to be monitored. The investor should have access to

the prevailing prices on the exchanges as well as market information that

can help predict price movements. Brokers provide commodity news,

research and analysis to their clients.

• Other information sources are financial dailies, specialized magazines on

commodities and the internet. Further, an investor requires a trading plan.

Such a trading plan can be developed in consultation with the broker. In

any case, the investor has to remember to ride his profits and cut his losses by using stop loss orders.

PROCESS FLOW IN COMMODITY FUTURES TRADING

ExchangeTrading System

Broker

Investor

Clearing Corporation Daily Mark to Market

Broker’sClearing Bank A/c

Order Confirmation

Order Confirmation

VSATLink

Gain / LossCredited / Debited to

Investor A/c

Daily Margin

Mumbai Address Level 11, Tower B, Peninsula Business

Park, S B Road, Lower Parel (W),Mumbai Maharashtra - 400013Telephone : +91 22 6687 9829

Nagpur Address 1st Floor, Nikalas Business Centre,Maharajbagh Road, Ramdaspeth,Nagpur, Maharashtra - 440010Telephone : +91 712 2422939

website : www.commtathya.com