12/31/2010 Beginners Guide to Commodities Tradi…

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Beginners Guide to Commodities Futures Trading in India
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Beginners Guide to Commodities Futures Trading in India
FUTURES
Make C onsistent and
About Futures
Indian markets have recently thrown open a new avenue for retail investors and Maximum Profits
Why Trade Futures?
traders to participate: commodity derivatives. For those who want to diversify their Trading Short Term
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portfolios beyond shares, bonds and real estate, commodities is the best option. Explosive Moves of
50 Basic Rules
Indian Stock and Index
Open Interest Till some months ago, this wouldn't have made sense. For retail investors could Futures in both BULL
Risk of Trading have done very little to actually invest in commodities such as gold and silver -- or and BEAR markets with
List of Securities oilseeds in the futures market. This was nearly impossible in commodities except our
Stop Loss Order for gold and silver as there was practically no retail avenue for punting in Futures Trading
Short Selling commodities. Newsletter

STOCKS However, with the setting up of three multi-commodity exchanges in the country,
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retail investors can now trade in commodity futures without having physical stocks!
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C ommodities actually offer immense potential to become a separate asset class for Check Performance
Short Term Trading
market-savvy investors, arbitrageurs and speculators. Retail investors, who claim
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to understand the equity markets may find commodities an unfathomable market. FREE SAMPLE
But commodities are easy to understand as far as fundamentals of demand and
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supply are concerned. Retail investors should understand the risks and advantages
Why Trade Indices Day Trading
of trading in commodities futures before taking a leap. Historically, pricing in
NSE Nifty 50 Extract Maximum
commodities futures has been less volatile compared with equity and bonds, thus
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providing an efficient portfolio diversification option.
time by capturing
COMMODITIES In fact, the size of the commodities markets in India is also quite significant. Of the Intra-Day Volatility in
Beginners Guide country's GDP of Rs 13,20,730 crore (Rs 13,207.3 billion), commodities related highly liquid Stock and
Gold Futures (and dependent) industries constitute about 58 per cent. Index Futures with our
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Newsletter C urrently, the various commodities across the country clock an annual turnover of
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Short Term Trading Rs 1,40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the
size of the commodities market grow many folds here on.
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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 Check Performance
sellers of commodities, and facilitates decisions related to storage and consumption
of commodities. In the process, they make the underlying market more liquid. FREE Sample Issue

Here's how a reta i l inv estor ca n get sta rted:

Commodities
Where do I need to go to trade in commodity futures? Make Profits by
capturing short-term
You have three options - the National C ommodity and Derivative Exchange, the trends in C ommodity
Multi C ommodity Exchange of India Ltd and the National Multi C ommodity Futures traded on both
Exchange of India Ltd. All three have electronic trading and settlement systems the NC DEX and MC X
and a national presence. C ommodity Futures
How do I choose my broker? Exchanges with
our
Several already-established equity brokers have sought membership with NC DEX Commodities
and MC X. The likes of Refco Sify Securities, SSKI (Sharekhan) and Trading
IC IC Icommtrade (IC IC Idirect), ISJ C omdesk (ISJ Securities) and Sunidhi Newsletter
C onsultancy are already offering commodity futures services. Some of them also
offer trading through Internet just like the way they offer equities. You can also get Check Performance
a list of more members from the respective exchanges and decide upon the broker
you want to choose from. FREE SAMPLE ISSUE

What is the minimum investment needed? SUBSCRIBE NOW!

You can have an amount as low as Rs 5,000. All you need is money for margins

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12/31/2010 Beginners Guide to Commodities Tradi…
payable upfront to exchanges through brokers. The margins range from 5-10 per
cent of the value of the commodity contract. While you can start off trading at Rs
5,000 with ISJ C ommtrade other brokers have different packages for clients.

For trading in bullion, that is, gold and silver, the minimum amount required is Rs
650 and Rs 950 for on the current price of approximately Rs 65,00 for gold for one
trading unit (10 gm) and about Rs 9,500 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 Merchant account,
begin will be approximately Rs 5,000. Credit Card Processing
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Do I have to give delivery or settle in cash?

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 Visit - Traderji.com
have to indicate at the time of placing the order that you don't intend to deliver the - a discussion forum
item. for Indian Stock
Market Investors &
If you plan to take or make delivery, you need to have the required warehouse Traders
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.

What do I need to start trading in commodity futures?

As of now you will need only one bank account. You will need a separate
commodity demat account from the National Securities Depository Ltd to trade on
the NC DEX just like in stocks.

What are the other requirements at broker level?

You will have to enter into a normal account agreements with the broker. These
include the procedure of the Know Your C lient 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., bank account no, etc.

What are the brokerage and transaction charges?

The brokerage charges range from 0.10-0.25 per cent of the contract value.
Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. 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 0.25 - 1 per cent of the contract value. The
brokerage cannot exceed the maximum limit specified by the exchanges.

Where do I look for information on commodities?

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.

Who is the regulator?

The exchanges are regulated by the Forward Markets C ommission. 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.

Who are the players in commodity derivatives?

The commodities market will have three broad categories of market participants
apart from brokers and the exchange administration - hedgers, speculators and

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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.

In which commodities can I trade?

Though the government has essentially made almost all commodities eligible for
futures trading, the nationwide exchanges have earmarked only a select few for
starters. While the NMC E has most major agricultural commodities and metals
under its fold, the NC DEX, has a large number of agriculture, metal and energy
commodities. MC X also offers many commodities for futures trading.

Do I have to pay sales tax on all trades? Is registration mandatory?

No. 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.

What happens if there is any default?

Both the exchanges, NC DEX and MC X, maintain settlement guarantee funds. The
exchanges have a penalty clause in case of any default by any member. There is
also a separate arbitration panel of exchanges.

Are any additional margin/brokerage/charges imposed in case I want to

take delivery of goods?

Yes. In case of delivery, the margin during the delivery period increases to 20-25
per cent of the contract value. The member/ broker will levy extra charges in case
of trades resulting in delivery.

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.

How much margin is applicable in the commodities 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.

Are there circuit filters?

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?

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