Introduction to Commodity Markets
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anant1a
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10 Steps to invest in Commodity Market
MUMBAI: In the last four years, futures trading in commodities has emerged as a major investment option in India.
These days, commodity market performance is equal to stock market; and analysts predict that commodities market will overtake capital market in trade volumes.
But since commodities futures market is a relatively new entrant in India, not many investors know how to tap and benefit from trading in various commodities.
Here are 10 steps that you need to know to invest in commodities market.
• Step 1: Locate a brokerage house with a reputation for service.
• Step 2: Fill a demat account opening form with a registered brokerage house and a member with the national commodity exchanges. You could require PAN card, address proof and passport size photos.
• Step 3: Be clear of the rules and regulations especially transaction costs.
• Step 4: Choose the right brokerage plan that optimises your costs, brokerage fees ranging from 0.03% - 0.08% on contract value.
• Step 5: Be clear of the service deliverables from your broker.
• Step 6: Insist on regular reports and special knowledge/training opportunities.
• Step 7: Set aside funds for commodity investing, but remember not at the cost of other traditional investing avenues.
• Step 8: Focus on a few commodities, gather requisite knowledge and pay up the initial amount for margin money, account opening charges and annual maintenance charges.
• Step 9: Clear any or all doubts now – set stop loss and book profit levels.
• Step 10: Get ready for investing and track your success and losses all the time.
MUMBAI: In the last four years, futures trading in commodities has emerged as a major investment option in India.
These days, commodity market performance is equal to stock market; and analysts predict that commodities market will overtake capital market in trade volumes.
But since commodities futures market is a relatively new entrant in India, not many investors know how to tap and benefit from trading in various commodities.
Here are 10 steps that you need to know to invest in commodities market.
• Step 1: Locate a brokerage house with a reputation for service.
• Step 2: Fill a demat account opening form with a registered brokerage house and a member with the national commodity exchanges. You could require PAN card, address proof and passport size photos.
• Step 3: Be clear of the rules and regulations especially transaction costs.
• Step 4: Choose the right brokerage plan that optimises your costs, brokerage fees ranging from 0.03% - 0.08% on contract value.
• Step 5: Be clear of the service deliverables from your broker.
• Step 6: Insist on regular reports and special knowledge/training opportunities.
• Step 7: Set aside funds for commodity investing, but remember not at the cost of other traditional investing avenues.
• Step 8: Focus on a few commodities, gather requisite knowledge and pay up the initial amount for margin money, account opening charges and annual maintenance charges.
• Step 9: Clear any or all doubts now – set stop loss and book profit levels.
• Step 10: Get ready for investing and track your success and losses all the time.
anant1a
New member
Commodity trade touches 1.47 trillion
MUMBAI: Commodity trade regulator Forward Markets Commission said the turnover of Indian commodity exchanges increased to Rs.1, 47,399.50 crores during the fortnight ending Oct.15. During the same period last year it was 1,38,438.05 crores.
The value of trade during April to Oct. 15 this year was Rs.19, 02,565.12 crores, which is lower than last year's 20,37,116.10 crore.
The Commission gave the fortnightly data at its web site. It also said it has revised the quantum of penalty for failure to meet delivery obligations and its use in respect of futures trading at the Nationwide Multi Commodity Exchanges.
MUMBAI: Commodity trade regulator Forward Markets Commission said the turnover of Indian commodity exchanges increased to Rs.1, 47,399.50 crores during the fortnight ending Oct.15. During the same period last year it was 1,38,438.05 crores.
The value of trade during April to Oct. 15 this year was Rs.19, 02,565.12 crores, which is lower than last year's 20,37,116.10 crore.
The Commission gave the fortnightly data at its web site. It also said it has revised the quantum of penalty for failure to meet delivery obligations and its use in respect of futures trading at the Nationwide Multi Commodity Exchanges.
anant1a
New member
Find Fortune in Commodity Futures
Farmers, Indians, countrymen, fear not commodity Futures. You have nothing to lose but gain a fortune in Futures market if you play it safely and legally. But, before you take the plunge, remember the cardinal rule in the game — a little knowledge is dangerous. So, empower yourself with enough information ere you decide to visit a broker with an intention to trade in commodities.
The rudimentary question before any farmer or common man who wants to play commodity Futures is: How to get started? Wait. Even before you start, you have some groundwork to do. First, you should comprehend that a Futures contract is an agreement between two parties to buy or sell a specified quantity and quality of asset at a certain time in future at a certain price agreed at the time of entering into the contract on the Futures exchange.
And the essence of Futures market is in its name: Trading involves a commodity for a future delivery date, as opposed to the present time. If a cotton farmer wishes to make a current sale, he should sell his crop in the spot market. Not in the Futures.
In Futures business, you buy or sell Futures contracts because you expect to make a profit on the transaction. In fact, most Futures and commodities traders have no use for the actual commodities they are trading — they never even see them. They are just people with a certain amount of capital to invest. There are millions of them and they come from almost every profession: from clerks to doctors. It is the millions of traders controlling the millions and millions of contracts that allow the exchanges survival.
However, if a farmer wants to lock in a price for an anticipated future sale (the marketing of a still unharvested crop), he has two options of either finding an interested buyer and negotiate the contract details of quantity and quality or sell in the Futures market. Advantages of the Futures option are many: The Futures contract is standardised so the farmer does not have to find a specific buyer. Again, the transaction can be executed instantaneously by just a phone call. The cost of the trade (commission) is minimal as compared to an individualised forward contract. Further, the farmer can offset the sale at any time between the original transaction date and the final trading day of the contract and the trading is guaranteed by the exchange.
IS IT YOUR CUP OF TEA?
The biggest advantage of Futures trade is that you don’t need a college degree or even a high school education to do well in Futures. However, you do need some training, you need an objective system, and you need a plan. With the setting up of three multi-commodity exchanges in the country, retail investors and farmers can now trade in commodity Futures without having physical stocks.
Farmers, Indians, countrymen, fear not commodity Futures. You have nothing to lose but gain a fortune in Futures market if you play it safely and legally. But, before you take the plunge, remember the cardinal rule in the game — a little knowledge is dangerous. So, empower yourself with enough information ere you decide to visit a broker with an intention to trade in commodities.
The rudimentary question before any farmer or common man who wants to play commodity Futures is: How to get started? Wait. Even before you start, you have some groundwork to do. First, you should comprehend that a Futures contract is an agreement between two parties to buy or sell a specified quantity and quality of asset at a certain time in future at a certain price agreed at the time of entering into the contract on the Futures exchange.
And the essence of Futures market is in its name: Trading involves a commodity for a future delivery date, as opposed to the present time. If a cotton farmer wishes to make a current sale, he should sell his crop in the spot market. Not in the Futures.
In Futures business, you buy or sell Futures contracts because you expect to make a profit on the transaction. In fact, most Futures and commodities traders have no use for the actual commodities they are trading — they never even see them. They are just people with a certain amount of capital to invest. There are millions of them and they come from almost every profession: from clerks to doctors. It is the millions of traders controlling the millions and millions of contracts that allow the exchanges survival.
However, if a farmer wants to lock in a price for an anticipated future sale (the marketing of a still unharvested crop), he has two options of either finding an interested buyer and negotiate the contract details of quantity and quality or sell in the Futures market. Advantages of the Futures option are many: The Futures contract is standardised so the farmer does not have to find a specific buyer. Again, the transaction can be executed instantaneously by just a phone call. The cost of the trade (commission) is minimal as compared to an individualised forward contract. Further, the farmer can offset the sale at any time between the original transaction date and the final trading day of the contract and the trading is guaranteed by the exchange.
IS IT YOUR CUP OF TEA?
The biggest advantage of Futures trade is that you don’t need a college degree or even a high school education to do well in Futures. However, you do need some training, you need an objective system, and you need a plan. With the setting up of three multi-commodity exchanges in the country, retail investors and farmers can now trade in commodity Futures without having physical stocks.
anant1a
New member
HERE YOU GO
A novice in the market must be wondering where he should go to trade in commodity futures. He has three exchanges — the National Commodity and Derivative Exchange (NCDEX), the Multi Commodity Exchange of India Ltd (MCX) and the National Multi Commodity Exchange of India Ltd (NMCE). All of them have electronic trading, settlement systems, and a national presence. The next step for you is to select a broker for you to do business.
A number of established brokers have membership with NCDEX and MCX. You can get a list of members from the respective exchanges and decide upon the broker you want to choose from. But, be very cautious when you select your broker. Check his credentials and confirm that he is a registered broker with the exchanges. It is better you meet your broker at least once before you authorise him to do business for you. Several of the brokers have the habit of always looking for their own profit rather than the client’s.
So he may force you to make decisions faster than required. Beware! Then, you will have to enter into a normal account agreements with the broker. These include the procedure of the ‘Know Your Client’ format that exist in equity trading and terms of conditions of the exchanges and the broker. Besides, you will need to give details such as PAN number, bank account number, etc.
The money part of it comes now. How much you need to start off? In fact, you can have an amount as low as Rs 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract. While you can start off trading at Rs 5,000 with some broking firms others have different packages for clients.
For trading in bullion (gold and silver), the minimum amount required is Rs 950 and Rs 1,800 on the current price of approximately Rs 95,00 for gold for one trading unit (10 gm) and about Rs 18,000 for silver (one kg). The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg, quintals or tonnes), but again the minimum funds required to begin will be approximately Rs 5,000.
At this point, another factor that will be bothering you will be the delivery part. Do you have to give delivery or settle in cash? Yes, you can do both. All the exchanges have both systems — cash and delivery mechanisms. The choice is yours. If you want your contract to be cash settled, you have to indicate at the time of placing the order that you don’t intend to deliver the item. And, if you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract.
And Indian system is so simple now that you don’t need anything else, except a bank account, to start trading. You will need a separate commodity demat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.
The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25-1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges.
The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don’t need to register themselves with the regulator. The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating than stock exchanges. But this could change if retail participation in commodities grows substantially.
Now with whom you are playing the market. The play ground has mainly three categories of players apart from brokers and the exchange administration — hedgers, speculators and arbitrageurs. The brokers will intermediate, facilitating hedgers and speculators. Hedgers are players with an underlying risk in a commodity — they may be either producers or consumers who want to transfer the price-risk onto the market.
Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer-hedgers would want to do the opposite. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.
Though the government has essentially made almost all commodities eligible for futures trading, the nationwide exchanges have earmarked only a select few for starters. While the NMCE has most major agricultural commodities and metals under its fold, the NCDEX has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for Futures trading.
One more factor which helps you in the commodities trade is that if the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally, it is the seller’s responsibility to collect and pay sales tax. The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number. In case of default, NCDEX and MCX maintain settlement guarantee funds.
The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery. There is no stamp duty applicable for commodity Futures that have contract notes generated in electronic form. However, in case of delivery, the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market.
The margin in commodities is calculated by value at risk (VaR) system. Normally, it is between 5 per cent and 10 per cent of the contract value. The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market margin. The margin keeps changing depending on the change in price and volatility. Moreover, the exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker.
SIZE OF THE CONTRACT
Futures contract is standardized in terms of quantity and quality as specified by the exchange. Size of the forward contract is customised as per the terms of agreement between the buyer and seller. Contract price of Futures contract is transparent as it is available on the centralised trading screen of the exchange. Contract price of forward contract is not transparent, as it is not publicly disclosed.
A novice in the market must be wondering where he should go to trade in commodity futures. He has three exchanges — the National Commodity and Derivative Exchange (NCDEX), the Multi Commodity Exchange of India Ltd (MCX) and the National Multi Commodity Exchange of India Ltd (NMCE). All of them have electronic trading, settlement systems, and a national presence. The next step for you is to select a broker for you to do business.
A number of established brokers have membership with NCDEX and MCX. You can get a list of members from the respective exchanges and decide upon the broker you want to choose from. But, be very cautious when you select your broker. Check his credentials and confirm that he is a registered broker with the exchanges. It is better you meet your broker at least once before you authorise him to do business for you. Several of the brokers have the habit of always looking for their own profit rather than the client’s.
So he may force you to make decisions faster than required. Beware! Then, you will have to enter into a normal account agreements with the broker. These include the procedure of the ‘Know Your Client’ format that exist in equity trading and terms of conditions of the exchanges and the broker. Besides, you will need to give details such as PAN number, bank account number, etc.
The money part of it comes now. How much you need to start off? In fact, you can have an amount as low as Rs 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract. While you can start off trading at Rs 5,000 with some broking firms others have different packages for clients.
For trading in bullion (gold and silver), the minimum amount required is Rs 950 and Rs 1,800 on the current price of approximately Rs 95,00 for gold for one trading unit (10 gm) and about Rs 18,000 for silver (one kg). The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg, quintals or tonnes), but again the minimum funds required to begin will be approximately Rs 5,000.
At this point, another factor that will be bothering you will be the delivery part. Do you have to give delivery or settle in cash? Yes, you can do both. All the exchanges have both systems — cash and delivery mechanisms. The choice is yours. If you want your contract to be cash settled, you have to indicate at the time of placing the order that you don’t intend to deliver the item. And, if you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract.
And Indian system is so simple now that you don’t need anything else, except a bank account, to start trading. You will need a separate commodity demat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.
The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25-1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges.
The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don’t need to register themselves with the regulator. The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating than stock exchanges. But this could change if retail participation in commodities grows substantially.
Now with whom you are playing the market. The play ground has mainly three categories of players apart from brokers and the exchange administration — hedgers, speculators and arbitrageurs. The brokers will intermediate, facilitating hedgers and speculators. Hedgers are players with an underlying risk in a commodity — they may be either producers or consumers who want to transfer the price-risk onto the market.
Producer-hedgers are those who want to mitigate the risk of prices declining by the time they actually produce their commodity for sale in the market; consumer-hedgers would want to do the opposite. Investors and traders wanting to benefit or profit from price variations are essentially speculators. They serve as counterparties to hedgers and accept the risk offered by the hedgers in a bid to gain from favourable price changes.
Though the government has essentially made almost all commodities eligible for futures trading, the nationwide exchanges have earmarked only a select few for starters. While the NMCE has most major agricultural commodities and metals under its fold, the NCDEX has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for Futures trading.
One more factor which helps you in the commodities trade is that if the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally, it is the seller’s responsibility to collect and pay sales tax. The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number. In case of default, NCDEX and MCX maintain settlement guarantee funds.
The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery. There is no stamp duty applicable for commodity Futures that have contract notes generated in electronic form. However, in case of delivery, the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market.
The margin in commodities is calculated by value at risk (VaR) system. Normally, it is between 5 per cent and 10 per cent of the contract value. The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market margin. The margin keeps changing depending on the change in price and volatility. Moreover, the exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker.
SIZE OF THE CONTRACT
Futures contract is standardized in terms of quantity and quality as specified by the exchange. Size of the forward contract is customised as per the terms of agreement between the buyer and seller. Contract price of Futures contract is transparent as it is available on the centralised trading screen of the exchange. Contract price of forward contract is not transparent, as it is not publicly disclosed.
anant1a
New member
Commodity Futures Trading - Why It's Not For Average Investors
Explains commodity and futures trading and the pitfalls you won't hear from the newsletter writers and "commodity trading gurus."
If you don't mind losing $5,000 in 10 minutes, you may enjoy trading commodity futures contracts. There's an old saying among commodity traders: "It's easy to make a small fortune in commodities. Just start with a large fortune!"
This is not a business for people who are emotionally attached to their money, yet thousands of average "investors" get lured into the commodity markets year after year. Why? Because of the possibility of making high percentage gains using the built-in leverage that is available to commodity futures traders.
The commodity markets include wheat, corn, soybeans, pork-bellies, gold, silver, heating oil, lumber, and numerous other common trade items. The huge companies that operate in these markets use commodity "futures" contracts to lock in their selling prices for the product in advance of delivery. This practice is called "hedging." On the other side of that transaction is the trader, who speculates on whether the priced of the commodity will go up or down before the contract is due for delivery. Because futures contracts may be purchased using leverage, these financial instruments lend themselves to speculation.
For example, control of a corn contract worth $5,000 may only require $500 of actual cash, or 10% of the face value of the contract. If the corn goes up in value, and the contract becomes worth, say, $5,500, the speculator has made $500 on his or her original $500, for a 100% return. Compare this with the regular stock market, which limits leverage to 50%, so that $5,000 worth of stock requires a minimum of $2,500 of capital. If the stock goes up to $5,500 in value, the $500 gain is against $2,500 invested, for a return of "only" 20%. The 100% return sure looks a lot better, right?
You can easily see why investors in search of quick gains are hypnotized by the lure of big profits using maximum leverage in commodity futures trading. The real problem, however, is that the leverage works in BOTH DIRECTIONS. You can lose your entire investment in a matter of minutes due to the wild price gyrations that sometimes occur in these volatile markets. Let's say the $5,000 contract drops to $4,000 in value instead of increasing. You've not only lost the original $500 you put into the contract, but an additional $500. You can go broke quickly this way.
So why do people play this game? Average investors do not wake up in the morning and say to themselves, "Right, I think I'll start trading commodities." What happens is that they receive a sales pitch from a commodity trading "guru" claiming to have a "system" for generating sure-fire profits in these wild markets. These "systems" range in price from $25 all the way up to $5,000 or more, and are sold based on the promise of "huge profits" from a small starting investment.
Newsletter writers or commodity gurus regularly pitch the myth about turning $5,000 into a million bucks in less than a year. The typical commodity system pitch comes in a long sales letter or booklet that describes a method for winning on "9 out of 10" trades or similar inflated claims. Of course, if it was possible to correctly trade 90% of the time, a person could easily amass millions of dollars in a very short period of time.
So why are these guys so eager for you to spend $195 on their super-duper trading course? Because they probably aren't making any real money with their own trading program! There's much safer money to be made selling others on the idea of getting into commodity futures trading.
There is no sure-fire way to consistently make money in these markets, simply because the underlying commodity prices can swing wildly back and forth depending on a complex set of variables, many of which are totally unpredictable. That's why the only people consistently making money in the commodity markets are the brokers, who collect a commission for executing the trade regardless of whether it wins or loses. There are also a handful of successful professional traders who make a living in these markets. But the vast majority of people who dabble in commodity futures lose money.
Unfortunately, with the lure of huge returns and easy money, a fresh crop of innocent traders enters the market each year, only to be quickly fleeced out of their money. Don't be one of them! Leave commodity futures trading to the professionals and stick with the more boring forms of investment, such as mutual fund investing or stocks and bonds.
Explains commodity and futures trading and the pitfalls you won't hear from the newsletter writers and "commodity trading gurus."
If you don't mind losing $5,000 in 10 minutes, you may enjoy trading commodity futures contracts. There's an old saying among commodity traders: "It's easy to make a small fortune in commodities. Just start with a large fortune!"
This is not a business for people who are emotionally attached to their money, yet thousands of average "investors" get lured into the commodity markets year after year. Why? Because of the possibility of making high percentage gains using the built-in leverage that is available to commodity futures traders.
The commodity markets include wheat, corn, soybeans, pork-bellies, gold, silver, heating oil, lumber, and numerous other common trade items. The huge companies that operate in these markets use commodity "futures" contracts to lock in their selling prices for the product in advance of delivery. This practice is called "hedging." On the other side of that transaction is the trader, who speculates on whether the priced of the commodity will go up or down before the contract is due for delivery. Because futures contracts may be purchased using leverage, these financial instruments lend themselves to speculation.
For example, control of a corn contract worth $5,000 may only require $500 of actual cash, or 10% of the face value of the contract. If the corn goes up in value, and the contract becomes worth, say, $5,500, the speculator has made $500 on his or her original $500, for a 100% return. Compare this with the regular stock market, which limits leverage to 50%, so that $5,000 worth of stock requires a minimum of $2,500 of capital. If the stock goes up to $5,500 in value, the $500 gain is against $2,500 invested, for a return of "only" 20%. The 100% return sure looks a lot better, right?
You can easily see why investors in search of quick gains are hypnotized by the lure of big profits using maximum leverage in commodity futures trading. The real problem, however, is that the leverage works in BOTH DIRECTIONS. You can lose your entire investment in a matter of minutes due to the wild price gyrations that sometimes occur in these volatile markets. Let's say the $5,000 contract drops to $4,000 in value instead of increasing. You've not only lost the original $500 you put into the contract, but an additional $500. You can go broke quickly this way.
So why do people play this game? Average investors do not wake up in the morning and say to themselves, "Right, I think I'll start trading commodities." What happens is that they receive a sales pitch from a commodity trading "guru" claiming to have a "system" for generating sure-fire profits in these wild markets. These "systems" range in price from $25 all the way up to $5,000 or more, and are sold based on the promise of "huge profits" from a small starting investment.
Newsletter writers or commodity gurus regularly pitch the myth about turning $5,000 into a million bucks in less than a year. The typical commodity system pitch comes in a long sales letter or booklet that describes a method for winning on "9 out of 10" trades or similar inflated claims. Of course, if it was possible to correctly trade 90% of the time, a person could easily amass millions of dollars in a very short period of time.
So why are these guys so eager for you to spend $195 on their super-duper trading course? Because they probably aren't making any real money with their own trading program! There's much safer money to be made selling others on the idea of getting into commodity futures trading.
There is no sure-fire way to consistently make money in these markets, simply because the underlying commodity prices can swing wildly back and forth depending on a complex set of variables, many of which are totally unpredictable. That's why the only people consistently making money in the commodity markets are the brokers, who collect a commission for executing the trade regardless of whether it wins or loses. There are also a handful of successful professional traders who make a living in these markets. But the vast majority of people who dabble in commodity futures lose money.
Unfortunately, with the lure of huge returns and easy money, a fresh crop of innocent traders enters the market each year, only to be quickly fleeced out of their money. Don't be one of them! Leave commodity futures trading to the professionals and stick with the more boring forms of investment, such as mutual fund investing or stocks and bonds.
anant1a
New member
About Commodity Market.
Investment in India has traditionally meant
property, gold and bank deposits. The more risk-taking investors choose
equity trading. But commodity trading forms a part of conventional
investment instruments. As a matter of fact, future trading in
commodities was banned in India in mid-1960 due to excessive
speculation. In February 2003, the government revoked the ban and threw
open futures trading in 54 commodities in bullion and agriculture. It
gave the go-ahead to four exchanges (The National Commodity and
Derivative Exchange (NCDEX), The Multi Commodity Exchange of India
(MCX), The National Multi Commodity Exchange of India (NMCE) and The
National Board of Trading in Derivatives (NBOT)) to offer online trading
in commodity derivatives products.
What makes commodity trading
attractive?
* A good low-risk portfolio diversifier
* A highly
liquid asset class, acting as a counterweight to stocks, bonds and real
estate.
* Less volatile, compared with, equities and bonds.
*
Investors can leverage their investments and multiply potential
earnings.
* Better risk-adjusted returns.
* A good hedge against any
downturn in equities or bonds as there is little correlation with equity
and bond markets.
* High co-relation with changes in inflation.
* No
securities transaction tax levied.
Investors' choice:
The futures
market in commodities offers both cash and delivery-based settlement.
Investors can choose between the two. If the buyer chooses to take
delivery of the commodity, a transferable receipt from the warehouse
where goods are stored is issued in favour of the buyer. On producing
this receipt, the buyer can claim the commodity from the warehouse. All
open contracts not intended for delivery are cash-settled. While
speculators and arbitrageurs generally prefer cash settlement, commodity
stockists and wholesalers go for delivery. The option to square off the
deal or to take delivery can be changed before the last day of contract
expiry. In the case of delivery-based trades, the margin rises to 0-25%
of the contract value and the seller is required to pay sales tax on the
transaction.
Trading in any contract month will open on the twenty
first day of the month, three months prior to the contract month. For
example, the December 2004 contracts open on 21 September 2004 and the
due date is the 20-day of the delivery month. All contracts settling in
cash will be settled on the following day after the contract expiry
date. Commodity trading follows a T+1 settlement system, where the
settlement date is the next working day after expiry. However, in case
of delivery-based traders, settlement takes place five to seven days
after the expiry.
Tradable Commodities:
World-over one will find
that a market exits for almost all the commodities. These commodities
can be broadly classified into the following:
Precious Metals: Gold,
Silver, Platinum etc.
Other Metals: Nickel, Aluminum, Copper
etc.
Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds
etc.
Soft Commodities: Coffee, Cocoa, Sugar etc.
Live Stock: Live
Cattle, Pork Bellies etc.
Energy: Crude Oil, Natural Gas, Gasoline
etc.
Returns from Commodity trading:
Absolute returns from stocks
and bonds are definitely higher than pure commodities. But commodity
trading carries a lower downside risk than other asset classes, as
pricing in commodity future is less volatile compared to equities and
bonds. While the average annual volatility is 25-30% in benchmark
equity indices like the BSE Sensex or NSE's Nifty, it is 12-18% in gold,
15-25% in silver, 10-12% in cotton and 5-10% in government
securities.
According to study, if an investor had put his money only
in silver and bonds from 1997-2003, his absolute returns would above
been 24%. Commodities are also good bets to hedge against inflation.
Gold offers good protection against exchange rate fluctuations, and, in
particular, against fluctuations in the value of the US dollar against
other leading currencies. However, unlike stocks, commodity prices are
dependent on their demand-supply position, global weather patterns,
government policies related to subsidies and taxation and international
trading norms as guided by the World Trade Organisation (WTO).
Growth
of commodity trading:
A soft interest rat regime and a weak US dollar
ahs increased the demand for the commodities. In a short span of over a
year, online commodity markets are witnessing good growth in India. The
daily volume of trading of Rs.2500 crore at NCDEX alone has surpassed
that of Rs.2000 crore on the Bombay Stock Exchange (BSE). It registered
a record daily traded volume of Rs.2617 crore on 8 December 2004.
Commodities like chana, urad, soya bean oil, sugar, pepper, mustard
seeds and wheat contributed to the balance trading volume. MCX, on the
other hand, has achieved a peak daily turnover of Rs.1889 crore. Though
the most popular commodities for trading in India are gold, silver, soya
bean and guar gum, the market is divided equally between bullion and
agricultural commodities in terms of trading volumes.
Expecting the
turnover on the three online commodity exchanges to spurt to Rs.10000
crore per day, banks are keen to tap the commodity trade-financing
front. Commercial banks are chasing the commodity industry with
attractive lending rates between 8% and 8.5% as against the normal
lending rate between 11% and 14%.
Problems galore:
The biggest
danger to the galloping trading business in commodities is poor
supervision. Even though the commodity futures market is regulated by
Forward market Commission, a proper regulatory system to supervise
trades needs to be implemented. This is because FMC, which functions
under the administrative control of the Ministry of Food and Consumer
Affairs, has no hands-on experience in monitoring electronic trading and
detecting market manipulation. For this reason, it was caught unawares
earlier this year when a rubber dealer made several shady deals.
In
June 204, the rubber dealer, registered with the Rubber Board, is
understood to have entered a series of shady circular transactions with
a sister firm on NMCE, creating a hefty difference of Rs.10 per kg
between cash and futures prices. FMC neither noticed the huge gap
between cash and future prices nor bothered to investigate thereby
signaling a relaxed regulatory regime in the commodities market, giving
way to arbitrageurs and speculators.
NCDEX is also understood to have
pressed for an amendment to the Banking Regulation Act to allow several
branches of banks to act as intermediaries to enable farmers to insulate
fro price fluctuations through futures trading. Another herculean task
in commodity trading is that of creating awareness and providing a
transparent and user-friendly trading platform to
investors.
Conclusion:
After almost two years that commodity
trading is finding favour with Indian investors and is been seen as a
separate asset class with good growth opportunities. For
diversification of portfolio beyond shares, fixed deposits and mutual
funds, commodity trading offers a good option for long-term investors
and arbitrageurs and speculators. And, now, with daily global volumes
in commodity trading touching three times that of equities, trading in
commodities cannot be ignored by Indian investors.
Online commodity
exchanges need to revamp certain laws governing futures in commodities
to make the markets more attractive. The national multi-commodity
exchanges have unitedly proposed to the government that in view of the
growth of the commodities market, foreign institutional investors, too,
should be given the go-ahead to invest in commodity futures in India.
Their entry will deepen and broad base the commodity futures market. As
a matter of fact, derivative instruments, such as futures, can help
India become a global trading hub for select commodities.
Commodity
trading in India is poised for a big take-off in India on the back of
factors like global economic recovery and increasing demand from China
for commodities. Considering the huge volatility witnessed in the
equity markets recently with the Sensex touching 6900 level commodities
could add the required zing to investors' portfolio. Therefore, it
won't be long before the market sees the emergence of a completely
redefined set of retail investors.
References:
1. John C. Hull,
"Introduction to Futures and Options Markets"(2/e):
Prentice-Hall
India Private Limited, New Delhi.
2. Roshini Rao, "Spicing up trading
": Capital Market (Dec 20,2004-Jan 2, 2005).
3. National Commodity & Derivatives Exchange Limited (NCDEX) Home page
4. Mcx
Investment in India has traditionally meant
property, gold and bank deposits. The more risk-taking investors choose
equity trading. But commodity trading forms a part of conventional
investment instruments. As a matter of fact, future trading in
commodities was banned in India in mid-1960 due to excessive
speculation. In February 2003, the government revoked the ban and threw
open futures trading in 54 commodities in bullion and agriculture. It
gave the go-ahead to four exchanges (The National Commodity and
Derivative Exchange (NCDEX), The Multi Commodity Exchange of India
(MCX), The National Multi Commodity Exchange of India (NMCE) and The
National Board of Trading in Derivatives (NBOT)) to offer online trading
in commodity derivatives products.
What makes commodity trading
attractive?
* A good low-risk portfolio diversifier
* A highly
liquid asset class, acting as a counterweight to stocks, bonds and real
estate.
* Less volatile, compared with, equities and bonds.
*
Investors can leverage their investments and multiply potential
earnings.
* Better risk-adjusted returns.
* A good hedge against any
downturn in equities or bonds as there is little correlation with equity
and bond markets.
* High co-relation with changes in inflation.
* No
securities transaction tax levied.
Investors' choice:
The futures
market in commodities offers both cash and delivery-based settlement.
Investors can choose between the two. If the buyer chooses to take
delivery of the commodity, a transferable receipt from the warehouse
where goods are stored is issued in favour of the buyer. On producing
this receipt, the buyer can claim the commodity from the warehouse. All
open contracts not intended for delivery are cash-settled. While
speculators and arbitrageurs generally prefer cash settlement, commodity
stockists and wholesalers go for delivery. The option to square off the
deal or to take delivery can be changed before the last day of contract
expiry. In the case of delivery-based trades, the margin rises to 0-25%
of the contract value and the seller is required to pay sales tax on the
transaction.
Trading in any contract month will open on the twenty
first day of the month, three months prior to the contract month. For
example, the December 2004 contracts open on 21 September 2004 and the
due date is the 20-day of the delivery month. All contracts settling in
cash will be settled on the following day after the contract expiry
date. Commodity trading follows a T+1 settlement system, where the
settlement date is the next working day after expiry. However, in case
of delivery-based traders, settlement takes place five to seven days
after the expiry.
Tradable Commodities:
World-over one will find
that a market exits for almost all the commodities. These commodities
can be broadly classified into the following:
Precious Metals: Gold,
Silver, Platinum etc.
Other Metals: Nickel, Aluminum, Copper
etc.
Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds
etc.
Soft Commodities: Coffee, Cocoa, Sugar etc.
Live Stock: Live
Cattle, Pork Bellies etc.
Energy: Crude Oil, Natural Gas, Gasoline
etc.
Returns from Commodity trading:
Absolute returns from stocks
and bonds are definitely higher than pure commodities. But commodity
trading carries a lower downside risk than other asset classes, as
pricing in commodity future is less volatile compared to equities and
bonds. While the average annual volatility is 25-30% in benchmark
equity indices like the BSE Sensex or NSE's Nifty, it is 12-18% in gold,
15-25% in silver, 10-12% in cotton and 5-10% in government
securities.
According to study, if an investor had put his money only
in silver and bonds from 1997-2003, his absolute returns would above
been 24%. Commodities are also good bets to hedge against inflation.
Gold offers good protection against exchange rate fluctuations, and, in
particular, against fluctuations in the value of the US dollar against
other leading currencies. However, unlike stocks, commodity prices are
dependent on their demand-supply position, global weather patterns,
government policies related to subsidies and taxation and international
trading norms as guided by the World Trade Organisation (WTO).
Growth
of commodity trading:
A soft interest rat regime and a weak US dollar
ahs increased the demand for the commodities. In a short span of over a
year, online commodity markets are witnessing good growth in India. The
daily volume of trading of Rs.2500 crore at NCDEX alone has surpassed
that of Rs.2000 crore on the Bombay Stock Exchange (BSE). It registered
a record daily traded volume of Rs.2617 crore on 8 December 2004.
Commodities like chana, urad, soya bean oil, sugar, pepper, mustard
seeds and wheat contributed to the balance trading volume. MCX, on the
other hand, has achieved a peak daily turnover of Rs.1889 crore. Though
the most popular commodities for trading in India are gold, silver, soya
bean and guar gum, the market is divided equally between bullion and
agricultural commodities in terms of trading volumes.
Expecting the
turnover on the three online commodity exchanges to spurt to Rs.10000
crore per day, banks are keen to tap the commodity trade-financing
front. Commercial banks are chasing the commodity industry with
attractive lending rates between 8% and 8.5% as against the normal
lending rate between 11% and 14%.
Problems galore:
The biggest
danger to the galloping trading business in commodities is poor
supervision. Even though the commodity futures market is regulated by
Forward market Commission, a proper regulatory system to supervise
trades needs to be implemented. This is because FMC, which functions
under the administrative control of the Ministry of Food and Consumer
Affairs, has no hands-on experience in monitoring electronic trading and
detecting market manipulation. For this reason, it was caught unawares
earlier this year when a rubber dealer made several shady deals.
In
June 204, the rubber dealer, registered with the Rubber Board, is
understood to have entered a series of shady circular transactions with
a sister firm on NMCE, creating a hefty difference of Rs.10 per kg
between cash and futures prices. FMC neither noticed the huge gap
between cash and future prices nor bothered to investigate thereby
signaling a relaxed regulatory regime in the commodities market, giving
way to arbitrageurs and speculators.
NCDEX is also understood to have
pressed for an amendment to the Banking Regulation Act to allow several
branches of banks to act as intermediaries to enable farmers to insulate
fro price fluctuations through futures trading. Another herculean task
in commodity trading is that of creating awareness and providing a
transparent and user-friendly trading platform to
investors.
Conclusion:
After almost two years that commodity
trading is finding favour with Indian investors and is been seen as a
separate asset class with good growth opportunities. For
diversification of portfolio beyond shares, fixed deposits and mutual
funds, commodity trading offers a good option for long-term investors
and arbitrageurs and speculators. And, now, with daily global volumes
in commodity trading touching three times that of equities, trading in
commodities cannot be ignored by Indian investors.
Online commodity
exchanges need to revamp certain laws governing futures in commodities
to make the markets more attractive. The national multi-commodity
exchanges have unitedly proposed to the government that in view of the
growth of the commodities market, foreign institutional investors, too,
should be given the go-ahead to invest in commodity futures in India.
Their entry will deepen and broad base the commodity futures market. As
a matter of fact, derivative instruments, such as futures, can help
India become a global trading hub for select commodities.
Commodity
trading in India is poised for a big take-off in India on the back of
factors like global economic recovery and increasing demand from China
for commodities. Considering the huge volatility witnessed in the
equity markets recently with the Sensex touching 6900 level commodities
could add the required zing to investors' portfolio. Therefore, it
won't be long before the market sees the emergence of a completely
redefined set of retail investors.
References:
1. John C. Hull,
"Introduction to Futures and Options Markets"(2/e):
Prentice-Hall
India Private Limited, New Delhi.
2. Roshini Rao, "Spicing up trading
": Capital Market (Dec 20,2004-Jan 2, 2005).
3. National Commodity & Derivatives Exchange Limited (NCDEX) Home page
4. Mcx
sreedurgabm
New member
The commodity market will definitely grow more faster than equity market.