COMMODITY TRADING

Commodity Basics

What is a commodity market?

A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market.In spot market, commodities are bought and sold for immediate delivery, whereas in derivatives market, various financial instruments based on commodities are traded. These financial instruments such as 'futures' are traded in exchanges.

Who regulates the commodity market?

Just as SEBI regulates the stock market, Forward Markets Commission (FMC) regulates commodity market.

Are e-Series products compulsory demat contracts? Can I get physical warehouse receipts on these? Yes. NSEL's e-Series products are compulsory demat contracts. For taking delivery of such units, you need to have a demat account. Similarly, for selling these contracts, you must hold demat units in your beneficiary account.

Are options also allowed in commodity derivatives?

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.

Are there any custody charges?

No. There are no custody charges for holding the demat units

Can I take physical delivery of goods on surrendering demat units?

Yes. You can take physical delivery of goods on surrendering demat units anytime you like. The delivery locations and procedures related to physical delivery are specified in the respective product note.

How is the futures contract defined?

Gold Pure Mumbai 1-Kg future contract expiring on 20th Mar, 2006 is defined as "NCD-FUT-GLDPURMUMK-20-MAR-2006". Wherein "NCD" stands for NCDEX, "FUT" stands for Futures as derivatives product, "GLDPURMUMK" for underlying commodity and "20-MAR-2006" for expiry date.

How is the value of the trade calculated?

It is not necessary that the unit of quantity and price is the same. For eg. Price for Gold is expressed in Rs per 10 gms but the quantity is submitted in gms. Therefore the quantity can not be multiplied directly. The value of an order/trade can be computed by multiplying the quantity with the price and then the result by the 'multiplier'. For eg. Multiplier incase of Gold is 10.

How many days does it take to open a beneficiary account?

It takes at least 1 to 3 working days to complete all formalities of opening a beneficiary account

How many days does it take to open a beneficiary account?

It takes at least 1 to 3 working days to complete all formalities of opening a beneficiary account

Is Sales Tax applicable on all trades?

If the trade is squared off sales tax is not applicable. The sales tax is applicable only if a trade results into delivery for the seller. Normally it's the seller's responsibility to collect and pay the sales tax. The sales tax is applicable at the place of delivery.

When you open a futures contract, the futures exchange will state a minimum amount of money that you must deposit into your account. This original deposit of money is called the initial margin. When your contract is liquidated, you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract. In other words, the amount in your margin account changes daily as the market fluctuates in relation to your futures contract. The minimum-level margin is determined by the futures exchange and is usually 5% to 10% of the futures contract. These predetermined initial margin amounts are continuously under review: at times of high market volatility, initial margin requirements can be raised.

Is Sales Tax Registration Compulsory?

Those who want to give (seller) physical delivery need to have sales tax registration number.

Is the concept of trading in commodity futures new in India?

Commodity futures market was very much there in earlier times in India. In fact it was one the most vibrant markets till the early 70s. But due to numerous restrictions the market could not develop further. Now that most of these restrictions have been removed, there is enormous scope for the development and growth of the commodity futures market in the country.

Is the margin % uniform for all stocks?

It may not be so. Margin percentage may differ from commodity to commodity based on the risk involved in it, which depends upon its liquidity and volatility besides the general market conditions. But all contracts within the same underlying would attract same margin %.

What are commodity futures?

A commodity futures contract is an agreement between two parties to buy or sell the commodity at a future date at today's future price. Futures contracts differ from forward contracts in the sense that they are standardized and exchange traded. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms standardized by the Exchange.

What is an "Underlying" and how is it different than "Contract"?

A commodity enabled for trading on futures is called an "Underlying" e.g. Pure Gold, Rubber. There may be various tradable contracts for the same underlying based on their different expiration period. For example NCD-FUT-RBRRS4KTM-20-Jan-2006, NCD-FUT-RBRRS4KTM-20-Feb-2006 are "contracts" available for trading in futures having Rubber as "underlying". There can be more than one underlying for different grades and location (for price basis) of the same commodity. For Eg. COTJ34BTD is Cotton J34 grade Bhatinda location and COTLSCKDI is Long Staple Cotton grade Kadi location. Similarly, COTS06KDI and COTS06SRN are two underlyings for the same grade of cotton but have their prices quoted as per different locations.

What is dematerialised or demat form of commodities?

Dematerialisation of commodities implies that these commodities are stored in Exchange-designated vaults/warehouses and the record of the ownership is in electronic form, just like trading in equity shares. The legal and beneficial owner of the goods gets a credit in his account electronically, which is similar to holding a pass book in the bank. Similarly, transfer of ownership against buy and sale is done from one account to the other, just like money transfer through a cheque. The depository keeps records of holding and transfers in electronic form. The opening of account and transfer instructions are carried out by the agents of the depository, called Depository Participants (DPs).

What is meant by calendar spread?

Calendar spread means risk off-setting positions in contracts expiring on different dates in the same underlying. For example, you take buy position for 20 MT in NCD-FUT-RBRRS4KTM-20-Feb-2006 @ 6550 per quintal and sell position for 10 MT in NCD-FUT-RBRRS4KTM-20-Mar-2006 @ 6850. 10 MT buy position in NCD-FUT-RBRRS4KTM-20-Feb-2006 and 10 MT sell position in NCD-FUT-RBRRS4KTM-20-Mar-2006 forms a spread against each other and hence called spread position. This spread position would be levied spread margin % for margin calculation instead of IM%. In this example, the balance 10 MT buy position in NCD-FUT-RBRRS4KTM-20-Feb-2006 would be non-spread position and would attract initial margin.

What is the difference between delivery in physical form and delivery in demat form?

In case of physical delivery, a person gets a warehouse receipt in paper form, while in case of delivery in demat form, he gets a credit entry in his demat account.

What is the pay-in and pay-out time for e-Series contracts?

Funds and delivery pay-in-is at 1:00 pm and pay-out is at 5:30 pm. Pay-in and pay-out for e-Series products are executed on the T+2 basis. Settlement is done from Monday to Friday, excluding holidays notified by the Exchange.

Who invests in commodities?

  • a. Investors.
  • b. Producers / Farmers.
  • c. Importers / Exporters.
  • d. Commodity financers.
  • e. Agricultural credit providing agencies.
  • f. Hedgers, speculators, arbitrageurs.
  • g. Large scale consumers. For e.g. refiners, jewelers, textile mills
  • h. Corporate having risk exposure in commodities.