This document provides an overview of commodity investment and trading. It defines commodities and commodity futures, describes how the commodity market works, and outlines the basic three-step process for individuals to trade commodity futures in India. Key points covered include choosing a broker, depositing an initial margin with the broker, and accessing market information and developing a trading plan. The market structure and roles of various organizations that facilitate commodity trading are also briefly outlined.

1. BEGINNERS GUIDE TO COMMODITY
INVESTMENT
BROUGHT TO YOU BY

2. INTRODUCTION TO COMMODITY MARKET

3. • Consumers and producers meet in the marketplace to buy and
sell commodities.
• Commodity market is a place where trading in commodities takes place
i.e, one buys or sells commodities.
• Demand and supply factors and related uncertainties determine the
mechanics of the commodity markets, and therefore of commodity
prices.
• Each commodity has its own, very distinct marketplace. The supply and
demand factors for wheat are very different from those for crude oil,
which in turn differ greatly from those for palladium.

4. • For investor purposes there are currently about 50 major commodity
markets worldwide that facilitate investment trade in nearly 100 primary
commodities.
• Commodities are split into two types: hard and soft commodities. Hard
Commodities are typically natural resources that must be mined or
extracted (gold, rubber, oil, etc.), whereas Soft Commodities are
agricultural products or livestock (corn, wheat, coffee, sugar,
soybeans, pork, etc.)

5. WHAT IS COMMODITY FUTURES ?

6. • A Commodity futures is an agreement between two parties to buy
or sell a specified and standardized quantity of a commodity at a
certain time in future at a price agreed upon at the time of entering into
the contract on the commodity futures exchange.
• The need for a futures market arises mainly due to the hedging function
that it can perform. Commodity markets, like any other financial
instrument, involve risk associated with frequent price volatility.
• Commodity market is an important constituent of the financial markets
of any country. This would help investors hedge their commodity risk,
take speculative positions in commodities and exploit arbitrage
opportunities in the market.

7. STRUCTURE OF COMMODITY MARKET

8. MINISTRY OF
CONSUMER
AFFAIRS
FORWARD
MARKET
COMMISSION
(FMC)
COMMODITY
EXCHANGE
NATIONAL
EXCHANGE
NCDEX MCX NMCE
REGIONAL
EXCHANGE
NBOT
20 OTHER
REGIONAL
EXCHANGES

9. HOW COMMODITY MARKET WORKS?

11. HOW TO TRADE IN COMMODITY FUTURES IN INDIA?

12. Trading in commodity market in India comprises of three simple steps.
Step One: Choosing a Broker
The broker you choose should be a member of the exchanges you wish to
trade in. Other than this, one should keep the following factors in mind while
choosing a broker:
• Competitive edge provided by the broker (commodity advisory,
commodity trading tips etc)
• Broker's knowledge of commodity markets
• Credibility of the broker
• Experience of the broker
• Net-worth of the broker
• Quality of broker's trading platforms

13. The relationship between the broker and the client is long-term. Thus
there must be a strong rapport, and mutual trust between the client
and the broker. Further, the client must communicate clearly to the
broker his needs and objectives for trading in commodities, whether
they are for the purpose of hedging, investment, etc. Further, your
objectives for entering the market provide you with a valuable
parameter to judge whether a broker fits your needs.

14. Step Two: Depositing the Margin
• To begin trading, the investor needs to deposit a margin with his
broker. Margin requirements are of two types, the initial margin and
the maintenance margin. These margin requirements vary across
commodities and exchanges but typically, the initial margin ranges from
5-10% of the contract value.
• The maintenance margin is usually lower than the initial margin. The
investor's position is marked to market daily and any profit or loss is adjusted
to his margin account. The investor has the option to withdraw any
extra funds from his margin account if his position generates a gain.
Also, if the account falls below the maintenance margin, a margin call
is generated from the broker and the investor needs to replenish his
account to the initial level.

15. Step Three: Access to Information and a Trading Plan
• As commodity futures are not long-term investments, their
performance needs to be monitored. The investor should have access to
the prevailing prices on the exchanges as well as market information that
can help predict price movements. Brokers provide commodity news,
research and analysis to their clients.
• Other information sources are financial dailies, specialized magazines on
commodities and the internet. Further, an investor requires a trading plan.
Such a trading plan can be developed in consultation with the broker. In
any case, the investor has to remember to ride his profits and cut his losses
by using stop loss orders.

16. PROCESS FLOW IN COMMODITY FUTURES TRADING

17. Exchange
Trading System
Broker
Investor
Clearing Corporation
Daily Mark to Market
Broker’s
Clearing Bank A/c
Order Confirmation
Order Confirmation
VSAT
Link
Gain / Loss
Credited / Debited to
Investor A/c
Daily Margin

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