Commodities market essentially represents another kind of organized market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate etc.
Commodities futures represent a good form of investment because of the following reasons:-
High Leverage - The margins in the commodity futures market are less than the F&O section of the equity market.
Diversification - The commodities market provides a better place for diversification of our portfolio.
Hedging - Commodity futures help us to procure or sell the commodities at a price decided months before the actual transaction. This process mitigates the risk of price fluctuation in subsequent month.
Lock-in the price for your produce - The price of agro-commodities may come down drastically at the time of harvest. Commodity futures can effectively lock-in the price at which we wish to sell our produce.
Assured demand - The selling commodity future can give assured demand for producing commodities.
Any glut in the market can make you wait unendingly for a buyer. Selling commodity futures contract can give you assured demand at the time of harvest.
Control your cost - If you are an industrialist, the raw material cost may dictate the final price of your output. Any sudden rise in the price of raw materials can compel you to pass on the hike to your customers and make your products unattractive in the market. By buying commodity futures, you can fix the price of your raw material.
Ensure continuous supply - Any shortfall in the supply of raw materials can stall your production and make you default on your sale obligations. You can avoid this risk by buying a commodity futures contract by which you are assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.
What is the difference between equity futures and commodity futures?
In equity futures the underlying asset is the equity share of any company whereas in commodity futures the underlying asset is the commodity itself.
What are the benefits of trading in commodity futures?
Futures trading in commodities results in transparent and fair price discovery on account of large scale participation and reflects views and expectations of wider section of people related to those commodities. Producers, traders and processors, exporters/importers get an online platform through MCX for price risk management.
Is an option trading in commodities allowed?
No. Options in goods are presently prohibited under Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or person can organize or enter into or make or perform options in goods. However the market expects the government to permit options trading in commodities soon.
How would the contracts be settled?
All open contracts not intended for delivery and non deliverable positions at client level would be cash settled.
What is the need for futures trading in commodities?
Futures trading in commodities results in transparent and fair price discovery on account of large-scale participation of entities associated with different value chains. It reflects views and expectations of a wider section of people related to a particular commodity. It also provides effective platform for price risk management for all segments of players ranging from producers, traders and processors to exporters/importers and end-users of a commodity. It also provides hedging, trading and arbitrage opportunities to market players.
