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Know about Commodity Futures

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Most seasoned investors usually get mind boggled by the Commodity Futures segment of the Indian equity market.

 

A detail explains how to go about commodity futures and what precautions are to be kept in mind before one becomes a full fledged investor. This also explains how one can successfully trade into bullion and how the metals fare among each other.

 

On what are the fundamental differences between the equity and commodities market, One will find a lot of volumes in commodity markets coming from upcountry rather than metro cities. Metro cities typically contribute lesser volumes. Upcountry, a lot of people feel comfortable trading commodities than the equities. They feel that probably understand chana much better than understanding Infosys Technologies

The entire market can be broadly divided into two major segments - agricultural commodities and non-agricultural commodities. Within non-agricultural commodities there are have commodities like precious metals, industrial metals and energy complex. These are typically broad based commodities.

 

In agricultural commodities there are grains which are typically the staples, softs like sugar and cotton and other exotic commodities like guar and spices. It includes a lot of things. Everything that is a tangible commodity can be traded.

 

As far as Indian commodity market's definition goes, anything which is raw in form and can be delivered, can only be traded. So, unlike the western counterparts where the Weather Futures, Rain Futures, other derivatives are traded which are non-deliverable, Indian market does not allow them. So, it is purely deliverable commodity market.

Nearly 80-90 commodities are listed on Indian market and if I am not being very optimistic about that, one can probably find almost all the commodities. If you are a retail investor, the liquidity is not a big problem. The issue is that in the last bottom 10 of the commodities, spices and some of the smarter commodities like rubber and cardamom. If you are investor who is investing Rs 2-5 lakh investment, you will find enough liquidity and you will not find any problem in entering or exiting these commodities

The primary difference between these two market itself is that the investors are typically different. The mindset is completely different.

 

One will find a lot of volumes in commodity markets coming from upcountry rather than metro cities. Metro cities typically contribute lesser volumes. Upcountry, a lot of people feel comfortable trading commodities than the equities. They feel that probably understand chana much better than understanding Infosys Technologies.

 

For him, he looks at chana, goes to the mandi. He trades this day in and day out, so he feels much more connected. Because he has that habit of trading commodities, he also trades in gold and silver irrespective of whether he knows something about them or not.

 

The predominant difference is that there is a very high amount of leverage in commodity markets. Secondly, most of the commodities have different expiry cycles and different months of trading. Agricultural commodities are traded 9-10 months out of 12 months.

 

There are two months which do not have contracts; typically these are the harvest months. So, when one is trading in agricultural commodities he should be aware of when the crop is sown, when the crop is harvested. It is like fundamentals in equities.

 

If one is trading gold, it is nothing but a Xerox copy of the COMEX contract. So, typically the expiries work on bimonthly basis. Gold and silver are bimonthly. There are six contracts in a year. There is no contract for every month.

 

For copper, it is a 12-month contract, so every month there is a contract. Even for industry metals like nickel, zinc, led, every month there are new contracts. The expiry is also different. For few commodities like mentha oil, the 31st of every month and for gold and silver the last working day of the previous month is typically its expiry.

 

Most of the agricultural commodities are 20th of the month. There are concepts like staggered delivery. In agricultural commodities, the last 15 days before the expiry, any day you can get a delivery. So, as a buyer one should be aware that any point of time one might get a delivery and one can be asked to pay the 100 percent amount of commodity and the investor will get a commodity in his/her demat account.

 

If one is not interested, then he should rollover and get out of this position and go to the next month. So, the investor should take care of these basic things before turning an investor in commodity market.

Happy Investing!!

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