by teamrecSince Commodity carries a commercial value which can be bought & sold in any state (raw or final produce) and the variation in price follows the simple dynamics of supply and demand, it creates depth in the market to invest. Therefore it is more logical and easier to understand than any other asset class.
Commodities Exchange is worldwide known for price discovery and providing opportunity to de-risk the intrinsic value against the uncertainty of the price prevailing in the market.
In recent past, attention of investors has shifted towards commodities investments when the other markets were not performing well. And particularly, Gold is an all time preferred investment & hedging option against the uncertainty of economy worldwide; we have seen it breach the $1000 per ounce making its new highs in international market as well as in the domestic markets with gold prices touching Rs. 16,000 per ten grams.
In India, there are several Regional Exchanges which are well-known for a particular commodity and provides the platform to their members to trade in. Apart from Regional Exchanges, there are nationally recognized exchanges MCX, NCDEX & NMCE using the state-of-art technology governed & regulated by Forward Market Commission (FMC).
The market operates on Standard contracts, which are designed in a way to keep the benchmark of quality & quantity standards of underlying asset which ensures smooth transactions & keeps a control on the price. (Minimum Support acts as statutory for essential commodities).
Only the underlying assets can be bought & sold on exchange platform when the client has registered with member of the exchange. The exchange participants are Speculators, Arbitragers and Hedgers who utilize the platform as per their need. For instance, a hedger may create a position against the inventory by being a seller or buyer, likewise a manufacturer of a commodity’s product may create a position on the basis of future requirement lying with him and when the price are not predefined it may move in any direction, he may however, freeze the price by creating a long position in best suited contract justifying the need of trade. In fact, this is the main function of the commodity exchanges.
Products like base/ precious metals and energy (Crude Oil & NG etc.) are popular and highly liquid wherein predictable position can be taken on either side based on research.
Compulsory delivery contract provides possibility for an arbitrager to reap the returns on investments by freezing differences in price of same commodities (quality and standards) in two different markets (Spot & Exchange’s future Market) called Cash & Carry, delivery mechanism ensures the profitability on trade done since Quality, quantity & delivery centers are predefined on the exchange contract. For example Symbol CHARJDDEL signifies the underling asset chana, quality is Rajasthan-Desi and delivery center is Delhi.
Domestic Spot markets and International Leading Commodities Exchanges are taken as benchmark for final settlements of specific commodity traded on national exchanges.
Since Physical transaction involves Sales Tax settlements at both ends, over and above delivery at designated warehouse invites expenses too, hence trader need to calculate all aspects for converting trade into absolute profits.
It is advisable for clients trading in commodities futures to create positions in liquid contracts following the stop loss policy and not to invest whole amount at a time, keep a part for paying Mark to Market, incase the position goes against the calculation. Incase trades are not being made for resulting delivery, square off the position or rollover in next month before contract falls into delivery period.
ABOUT THE AUTHOR
Mr. Syed Iftekhar Abdi is currently working as Vice President – Internet Trading in Reliagare Commodities Ltd., a part of the Religare Enterprises, a diversified financial services group with a pan-India presence and presence in multiple international locations. He has over nine years of exposure in Sales and Marketing with 5+ years in Broking Industry.
Mr. Abdi is an alumni of Lucknow University with a degree in Master’s of Information Technology from Manipal Academy of Higher Education and has also done an Executive Program in General Management from IIM – Calcutta.
He started his career as an entrepreneur, before joining as an employee of InfoVision – an associate of ICICI Prudential Life Insurance. He moved on to join Multi Commodities Exchange, at their Delhi Regional Office when the Exchange started operations. He was associated in building up the team, introduced several members to the exchange and worked for the delivery platform for Agri products in Delhi.
His associated with Religare Commodities Ltd. in Jan 2005, as Manager Commodities and has worked in different capacities and handled several responsibilities, establishing North India business as Product Head- Offline business.
Thereafter, he was given the responsibility of establishing the new venture of Religare Commodities – Mandi as Associate Vice President. He built Mandi as an one stop shop for all financial products, Introduced Cash & Carry business and successfully handled procurement and deliveries on exchange and spot markets.
Following up on the success, he’s been promoted as Vice president-Online Business for establishing Commodities/currency and Alternate Channels business (all products through Bank Invest and independent Agents/DSA).
