For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities is the best option. Till some months ago, this wouldn't have made sense.
For retail investors could have done very little to actually invest in commodities such as gold and silver -- or oilseeds in the futures market. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities.
However, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks! Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators.
Retail investors, who claim to understand the equity markets may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned.
Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. In fact, the size of the commodities markets in India is also quite significant. Currently, the various commodities across the country clock an annual turnover of Rs 1,40, crore Rs 1, billion. With the introduction of futures trading, the size of the commodities market grow many folds here on.
Like any other market, the one for commodity futures plays a valuable role in information pooling and risk sharing. The market mediates between buyers and sellers of commodities, and facilitates decisions related to storage and consumption of commodities. In the process, they make the underlying market more liquid.
All three have electronic trading and settlement systems and a national presence. Some of them also offer trading through Internet just like the way they offer equities. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from.
You can have an amount as low as Rs 5, All you need is money for margins payable upfront to exchanges through brokers. The margins range from per cent of the value of the commodity contract.
While you can start off trading at Rs 5, with ISJ Commtrade other brokers have different packages for clients. For trading in bullion, that is, gold and silver, the minimum amount required is Rs and Rs for on the current price of approximately Rs 65,00 for gold for one trading unit 10 gm and about Rs 9, 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, 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. 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.
As of now you will need only one bank account. 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 broker. Besides you will need to give you details such as PAN no.
The brokerage charges range from 0. 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. The brokerage cannot exceed the maximum limit specified by the exchanges. Daily financial newspapers carry spot prices and relevant news and articles on most commodities. Besides, there are specialised magazines on agricultural commodities and metals available for subscription.
Brokers also provide research and analysis support. But the information easiest to access is from websites. Though many websites are subscription-based, a few also offer information for free. You can surf the web and narrow down you search. 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. The commodities market will have three broad categories of market participants apart from brokers and the exchange administration - hedgers, speculators and arbitrageurs.
Brokers will intermediate, facilitating hedgers and speculators. Hedgers are essentially 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.
For example, if you are a jewellery company with export orders at fixed prices, you might want to buy gold futures to lock into current prices. 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.
MCX also offers many commodities for futures trading. 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. 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 per cent of the contract value. Is stamp duty levied in commodity contracts? What are the stamp duty rates? As of now, 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. As in stocks, in commodities also the margin 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. Yes 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. Interested in commodities futures trading? Here's how a retail investor can get started: Where do I need to go to trade in commodity futures?
How do I choose my broker? What is the minimum investment needed? Do I have to give delivery or settle in cash? What do I need to start trading in commodity futures? What are the other requirements at broker level? What are the brokerage and transaction charges? Where do I look for information on commodities?
Who is the regulator? Who are the players in commodity derivatives? In which commodities can I trade? Do I have to pay sales tax on all trades? What happens if there is any default? How much margin is applicable in the commodities market? Are there circuit filters? Any action you choose to take in the markets is totally your own responsibility.More...