Print Email Download

Free Essays - Economics Essays

Equity Commodity Investment

“A COMPARATIVE STUDY BETWEEN EQUITY & COMMODITY INVESTMENT OPTION”

ABSTRACT

India, a commodity based economy where two-third of the one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. Unlike the physical market, futures markets trades in commodity are largely used as risk management (hedging) mechanism on either physical commodity itself or open positions in commodity stock. For instance, a jeweller can hedge his inventory against perceived short-term downturn in gold prices by going short in the future markets.

The study aims to know how of the commodities market and how the commodities traded on the exchange. The idea is to understand the importance of commodity derivatives and learn about the market from Indian point of view. In fact it was one of the most vibrant markets till early 70s. Its development and growth was shunted due to numerous restrictions earlier. Now, with most of these restrictions being removed, there is tremendous potential for growth of this market in the country.

You can get expert help with your essays right now. Find out more...

ACKNOWLEDGEMENT

SYNOPSIS FOR THESIS

DESIRED AREA

Investments - Commodity Market in India

TITLE OF THE THESIS

Comparative Study between Equity & Commodity Investment Options”

PROBLEM DEFINITION / HYPOTHESIS / RESEARCH OBJECTIVE

INTRODUCTION / LITERATURE TO THE AREA OF RESEARCH

In the Capital Markets of the world, preferably in India, Stock is considered as the first option of investment. But, as we all know that there are many other options available with the people to invest / park their hard earned in & some of these options are Derivative Market, Mutual Funds, NSC, KVPS, Insurance, FD, Savings A/c’s & obviously less considered is the Commodity Market. In the above mentioned options there are some options that do not have the risk factor in it & thus they give less return, while others having risk gives more return to the investor.

One does not know that the Investments in Commodities will also yield almost the same returns as compared with the Stock, having the same amount of risk involved.

SCOPE

This research would throw light on the mentioned objectives & make people aware of Commodity Futures as an Investment option – which is at its growing stage.

RESEARCH METHODOLOGY

Primary Data Collection

Secondary Data Collection

“Investment is a term with different closely-related meanings in business, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or in a similar way a deposit is made in a bank, in hopes of getting a future return or interest from the same. Literally, investment means the "action of putting something somewhere else"

In finance, investment can be referred to as buying securities or other monetary assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate etc. Valuation is the method for finding the true value of an asset.

Different financial investments include shares, bonds and other equity investments. These financial assets are then expected to provide income/ positive future cash streams, and may increase or decrease in its value giving the investor capital gains or losses.

Trading in contingent claims or derivative securities do not necessarily have future positive cash flows, and so are not considered assets, or securities or investments. Nevertheless, since their cash flows are closely related to or it is derived from cash flow of specific securities, they are often treated as investments.

Banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs can be used to make investments indirectly. An intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary, though their legal and procedural details differ.

LITERATURE REVIEW

The capital market (securities markets) is the market for securities, where the companies and the government can raise funds for long term. Stock market and the bond market form part of capital market. Financial regulators, such as the RBI and SEBI, keep a watch on the capital markets in their respective countries to ensure that investors are protected against any fraud. The capital markets consist of the primary market, where the company floats new securities to investors, and the secondary market, where existing securities are traded.

STRUCTURE OF CAPITAL MARKET

Primary Market

Secondary Market

Derivative Market

Commodity Market

International Market

IPO Public Issue)

Right Issue

Private Placement

Sale purchase of existing share & debenture & Mutual fund

Option

Future

Call

Option

Put Option

Gold

Silver

Material

Etc.

NYSE Composite

NASDAQ Composite

Dow Jones I.A.

S4P 500

NIKKEI – 225

NSE

BSE

Dealing in

MCX dealing in

STRUCTURE OF SECURITY MARKET

Primary Market

Secondary Market

Derivative Market

Commodity Market

International Market

IPO Public Issue)

Right Issue

Private Placement

Sale purchase of existing share & debenture & Mutual fund

Option

Future

Call

Option

Put Option

Gold

Silver

Material

Etc.

NYSE Composite

NASDAQ Composite

Dow Jones I.A.

S4P 500

NIKKEI – 225

NSE

BSE

Dealing in

MCX dealing in

A) Primary Market: It is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funds through the issue of a new stock or bond which is called initial public offering (IPO). This is typically done through a syndication of securities dealers which in return earn a commission that is built into the price of the security offering.

B) Secondary Market: The secondary market is the market for trading of securities that have already been issued in the market. Aftermarket is known as the market that exists in a new security just after the new issue. Investors and speculators can easily trade on the exchange once a newly issued stock is listed on a stock exchange, as market makers make bids and offers in the new stock.

C) Derivative Market: -

Derivative Market

Future Market

Option Market

Future Contract

Say – One month

– Two month

– Three month

Call Option

Put Option

Future Contracts: - The future contracts are the future contracts or bids for some specific period like one month, two months and three months, accepted from investor in capital market which is put.

Option Market :- The option market is the place where trading is for call and put or buy and sell and only the premium is charged for all call and put trading.

D) Commodity Market:

Commodity trading might sound like a strange term, but simply put, commodities are items like, wheat, corn, gold and silver, and Cattle and Pork Bellies, and Crude Oil and it has emerged as an important player in the way that people invest in and speculate.

INVESTMENT ALTERNATIVES

INVESTMENT

Financial Assets

Real Estate

Marketable Financial Assets.

Non-marketable Financial Assets

Treasury Bills

C.D.

C.P.

Repo

Govt. Fixed Insurance bond

Govt. Securities

Debenture

Shares

Mutual Fund

Equity

Pref

NSS

Bank Deposit

Post Office

KVP

NSC

Company Deposit

EPF/PPF

LIC

Gold

Silver

Previous objects

Painting /Art

Land / Building

Machinery/Equipment etc

MARKETABLE FINANCIAL ASSETS

Shares (Equity and Preference Share): If you have equity shares of a company, you have an ownership stake in that company. This essentially means that you have a residual interest in income and wealth of the company. Equity shares are classified into the following broad categories -

Bonds: Bonds or debentures represent long-term debt instruments where issuer of a bond promises to pay a stipulated stream of cash flow. Bonds may be classified into the following categories -

Money Market Instruments:- Money market instruments are debt instruments which have a maturity of less than one year at the time of issue. The important money market instruments are:

Mutual Funds:

A Mutual Fund is a trust that collects the savings of a number of investors, and invest in capital market instruments such as shares, debentures and other securities who share a common financial goal. Unit holders share the income earned through these investments and the capital appreciation in proportion to the number of units owned by them. Mutual Fund offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost and thus is the most suitable investment for the common man.

NON-MARKETABLE FINANCIAL ASSETS:

A good portion of financial assets is represented by non-marketable financial assets. These can be classified into the following broad categories.

Life Insurance: Life insurance can also be considered as an investment as insurance premiums represent the sacrifice, and the assured sum represents the benefit. The important types of insurance policies in India are :

REAL ESTATES AND OTHERS

Real Estate: Residential house is the most important asset in the portfolio for the bulk of the investors. More affluent investors are likely to be interested in the following types of real estate, in addition to a residential house -

Precious Object: Precious objects are items that are highly valuable in monetary terms. Some important precious objects are ;

Financial Derivatives: A financial derivative is an instrument whose value is derived, from the value of an underlying asset be it a real asset, such as gold wheat or oil, or a financial asset, such as a stock, stock index, bond or foreign currency.

Forwards Contracts

A forward contract, as it occurs in both forward and futures markets, always involves a contract initiated at one time;

Further, the type of forward contracting to be considered here always involves an exchange of one asset for another and the price at which the exchange occurs is set at the time of the preliminary contracting. Actual payment and delivery of the good occur afterwards.

Futures Contracts

A futures contract is highly standardized forward contract with closely specified contract terms and it calls for the exchange of some good at a future date for cash, with the payment for the good to occur at that future date like all forward contracts. The buyer of a futures contract undertakes to receive delivery of the good and pay for it while the seller of a futures promises to deliver the good and take delivery of payment. The price of the good is determined at the initial time of contracting.

Option

Option contracts grant the right but not the compulsion to buy in the case of a call or sell, in the case of a put a specified quantity of an asset at a predetermined price on or before a specified future date option contract would expire if it is not in the best interest of the option owner to exercise.

Swaps

Swaps normally trade in the OTC market but there is monitoring of this market segment. Swaps are agreement between two parties to exchange cash flows in the future according to a approved formula and In case of popular interest rate swap, one party agrees to pay a series of set cash flows in exchange for a sequence of variable cost.

When compared to global derivatives markets Indian derivative markets are still in the emerging stage. Indian derivatives markets share in the world derivatives market’s value and volumes are very small. But with the starting of trading in different financial and commodities segment, Indian markets are growing very fast. Indian markets are operating with high efficiency and on parity with international standards.

The major exchanges and the derivative products traded in India:

1. Bombay Stock Exchange (BSE)

2. National Stock Exchange OF India Ltd (NSE)

3. National Commodity & Derivatives Exchange Limited (NCDEX)

4. Multi Commodity Exchange of India Ltd (MCX)

5. National Multi Commodity Exchange of India Ltd (NMCE)

INVESTMENT ATTRIBUTES

For evaluating an investment values, the following attributes are relevant.

Rate of Return:

The rate of return on an investment for a period (which is usually a period of one year) is defined as follows:

Rate of return = Annual income + (Ending price – Beginning price)

Beginning price

To illustrate, consider the following information about a certain equity share.

The rate of return of this share is calculated as follows:

4.00 + (87.0-80.00)

= 13.75 percent

80.00

Yield

Investors can use yield to measure the performance of their investments and compare it to the yield on other investments or securities. Generally, higher risk securities offer higher expected yields as compensation for the additional risk incurred through ownership of the security. Investors looking to make income or cash flow streams from equity investments commonly look for stocks that shell out high dividend yields, in other words, stocks that give a relatively large amount of annual cash dividends for a relatively low share price.

Annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he/ she purchased the bond and held it for a year. This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are continuously changing due to market factors.

Capital Appreciation: It’s the rise in the market price of an asset. Capital appreciation is one of two major ways for investors to profit from an investment in a company. The other is through dividend income.

Risk

The risk of investment may be classified in following ways

Type of Risk

  • Internal Rate of Return Risk
  • Market risk
  • Inflation Risk
  • Default Risk
  • Business Risk
  • Financial Risk
  • Management Risk
  • Liquidity Risk

The rate of return from investments like equity shares, real estate, and gold can vary rather widely. The risk of investment refers to the variability of its rate of return: How much do individual outcomes deviate form the expected value? A simple measure of dispersion is the range of values, which is simply the difference between the highest and the lowest values. Other measures commonly used in finance are as follows:

Variance :This is the mean of the squares of deviations of individual returns around their average values

Standard deviation:This is the square root of variance

Beta :This reflects how volatile the return from an investment is, in response to market swings.

Risk = Actual Return – Expected Returns

Condition:

Low Variance (Low Risk)

High Variance (High Risk)

Expected

Return

Marketability:

An investment is highly marketable or liquid if: (a) it can be transacted quickly: (b) the transaction cost is low; and (c) the price change between two successive transactions is negligible. The liquidity of a market may be judged in terms of its depth, breadth, and resilience. Depth refers to the existence of buy as well as sell orders around the current market price. Breadth implies the presence of such orders in substantial volume. Resilience means that new orders emerge in response to price changes. Generally, equity shares of large, well – established companies enjoy high marketability and equity shares of small companies in their formative years have low marketability. High marketability is a desirable characteristic and low marketability is an undesirable one.

How does one evaluate the marketability of an investment like a provident fund deposit which is non-marketable by its very nature? In such a case, the relevant questions of ask is: can withdrawals be made or loans be taken against the deposit? Such as investment may be regarded as highly marketable if any of the following conditions are satisfied:

Tax Shelter:

Some investments provide tax benefits; others do not. Tax benefits are of the following three kinds.

Initial Tax Benefit; An initial tax benefit refers to the tax relief enjoyed at the time of making the investment. For example, when you make a deposit in a Public Provident Fund Account, you get a tax benefit under Section 80 C of the Income Tax Act.

Continuing Tax Benefit: A continuing tax benefits represent the tax shield associated with the periodic returns form the investment. For example, dividend income and income from certain other sources are tax – exempts, upto a certain limit, in the hands of the recipient.

Terminal Tax Benefits; A terminal tax benefit refers to relief from taxation when an investment is realized or liquidated. For example, a withdrawal from a Public Provident Fund Account is not subject to tax.

Convenience:

Convenience broadly refers to the ease with which the investment can be made and looked after. Put differently, the questions that we ask to judge convenience are:

The degree of convenience associated with investments varies widely. At one end of the spectrum is the deposit in a savings bank account that can be made readily and that does not require any maintenance effort. At the other end of the spectrum is the purchase of a property that may involved a lot of procedural and legal hassles at the time of acquisitions and a great deal of maintenance effort subsequently.

A COMPARATIVE STATEMENT OF VARIOUS INVESTMENTS ALTERNATIVES

A summary evaluation of these investment avenues in terms of key investment attributes is given in Exhibit below. It must be emphasized that within each investment category individual assets display some variations.

Exhibit: Summary Evaluation of Various Investment Avenues

Return

Current yield

Capital appreciation

Risk

Marketability / Liquidity

Tax shelter

Convenience

Equity Shares

Low

High

High

Fairly high

High

High

Non – convertible Debentures

High

Negligible

Low

Average

Nil

High

Equity Schemes

Low

High

High

High

High

Very high

Debt Schemes

Moderate

Low

Low

High

No tax on dividends

Very high

Bank deposits

Moderate

Nil

Negligible

High

Nil

Very high

Public provident fund

Nil

Moderate

Nil

Average

Section 80 C benefit

Very high

Residential

Moderate

Moderate

Negligible

Low

High

Fair

Gold and Silver

Nil

Moderate

Average

Average

Nil

Average

INVESTMENT VERSUS SPECULATION

While it is difficult to draw the line of distinction between investment and speculation, it is possible to broadly distinguish the characteristics of an investor from those of a speculator as follows.

Investor

Speculator

Planning horizon

An investor has a relatively longer planning horizon. His holding period is usually at least one year.

A speculator has a very short planning horizon. His holding may be a few days to a few months.

Risk disposition

An investor is normally not willing to assume more than moderate risk. Rarely does he knowingly assume high risk.

A speculator is ordinarily willing to assume high risk.

Return expectation

An investor usually seeks a modest rate of return which is commensurate with the limited risk assumed by him

A speculator looks for a high rate of return in exchange for the high risk borne by him.

Basis for decisions

An investor attaches greater significance to fundamental factors and attempts a careful evaluation of the prospects of the firm

A speculator relies more on hearsay, technical charts, and market psychology.

Leverage

Typically an investor uses his own funds and eschews borrowed funds.

A speculator normally resorts to borrowings, which can be very substantial, to supplement his personal resources.

APPROACHES FOR INVESTMENT DECISION MAKING

The stock market is thronged by investors pursuing diverse investment strategies which may be subsumed under four broad approaches.

Common errors in investment management

Investors appear to be prone to the following errors in managing their investments.

HOW TO INVEST IN EQUITY SHARES OR (I.P.O.)

Equity capital represents ownership capital. Equity shareholders collectively own the company. They bear the risk and enjoy the rewards of ownership. Of all the form of securities, equity shares appear to be most romantic. While fixed income investment avenues may be more important to most of the investor, equity shares seem to capture their interest the most. The potential rewards and penalties associated with equity shares make them an interesting, even exciting, proposition. No wonder, equity investment is a favourite topic of conversation in parties and get – together.

Terminology

The amount of capital that a company can issue as per its memorandum represents the authorized capital. The amount offered by the company to the investors is called the issued capital. That part of the issued capital that has been subscribed to by the investors is called the paid-up capital. Typically, the issued, subscribed, and paid-up capital are the same.

The par value is stated in the memorandum and written on the share scrip. The par value of equity shares is generally Rs 10 (the most popular denomination) or Rs 100. Infrequently, one comes across par values like Re1, Rs 5, Rs 40, and Rs 1,000. The issue price is the price at which the equity share is issued. When the issue price exceeds the par value, the difference is referred to as the share premium. Not that the issue price cannot be, ordinarily, lower than the par value.

The book value of an equity share is equal to :

Paid-up equity capital + Reserves and Surplus

Number of outstanding equity shares

Quite naturally, the book value of an equity share tends to increase as the ratio of reserves and surplus to the paid – up equity capital increases. The market value of an equity share is the price at which it is traded in the market. The price can be easily established for a company that it listed on the stock market and actively traded. For a company that is listed on the stock market but traded very infrequently, it is difficult to obtain a reliable market quotation. For a company that is not listed on the stock market, one can merely conjecture as to what its market price would be if it were traded.

Stock Market Classification of Equity Shares

In stock market parlance, it is customary to classify equity shares as follows:

Blue – chip shares

Shares of large, well-established, and financially strong companies with an impressive record of earnings and dividends.

Growth Shares

Shares of companies that have a fairly entrenched position in a growing market and which enjoy an above average rate of growth as well as profitability.

Income shares

Shares of companies that have fairly stable operations, relatively limited growth opportunities, and high dividend payout ratios.

Cyclical Shares

Shares of companies that have a pronounced cyclicality in their operations.

Defensive Shares

Shares of companies that are relatively unaffected by the ups and downs in general business conditions.

Speculative Shares

Shares that tend of fluctuate widely because there is a lot of speculative trading in them.

Note that the above classification is only indicative. It should not be regarded as rigid and straitjacketed. Often you can’t pigeonhole a share exclusively in a single category. In fact, many shares may fall into two (or even more) categories.

SPECIFICATION OF INVESTMENT OBJECTIVES AND CONSTRAINTS

The first step in the portfolio management process is to specify the investment policy, which summarizes the objectives, constraints, and preferences of the investor. The investment policy may be expressed as follows:

Objectives

The commonly stated investment goals are:

Since income and growth represent two ways by which return is generated and stability implies containment or even elimination of risk, investment objectives may be expressed more succinctly in term of return and risk. As an investor, you would primarily be interested in a higher return in the form of income and / or capital appreciation) and a lower level of risk. However, return and risk typically go hand in hand. So you have to ordinarily bear a higher level of risk in order to earn a higher return. How much risk you would be willing to bear to seek a higher return, depends on your risk disposition. Your investment objective should state your preference for return relative to your distaste for risk.

Risk Assessment

Financial advisers, mutual funds, and brokerage firms have developed risk questionnaires to help investors determine whether they are conservative, moderate, or aggressive. Typically, such risk questionnaire have 7 to 10 questions to gauge a person’s tendency to make risky or conservative choices in certain hypothetical situations. While these risk questionnaires are not precise, they are helpful in getting a rough idea of an investor’s risk tolerance.

Constraints

In pursuing your investment objective, which is specified in terms of return requirement and risk tolerance, you should bear in mind the constraints arising out of or relating to the following factors:

Liquidity: Liquidity refers to the speed with which an asset can be sold, without suffering any discount to its fair market price. For example, money market instruments are the most liquid assets, whereas antiques are among the least liquid.

Taking into account your cash requirements in the foreseeable future, you must establish the minimum level of ‘cash’ you want in your investment portfolio.

Investment Horizon: The investment horizon is the time when the investment or part thereof is planned to be liquidated to meet a specific need. For example, the investment horizon may be ten years to fund a child’s college education or thirty years to meet retirement needs. The investment horizon has an important bearing on the choice of assets.

Tax: What matters finally is the post-tax return from an investment. Tax considerations therefore have an important bearing on investment decisions. So, carefully review the tax shelters available to you and incorporate the same in your investment decisions.

Regulations: While individual investors are generally not constrained much by law, institutional investors have to conform to various regulations. For example, mutual funds in India are not allowed to hold more than 10 percent of the equity shares of a public company.

Unique Circumstances: Almost every investor faces unique circumstances. For example, an individual may have the responsibility of looking after ageing parents. Or, an endowment fund may be precluded form investing in the securities of companies making alcoholic products and tobacco products.

Selection of Asset Mix

Based on your objectives and constraints, you have to specify your asset allocation, that is, your have to decide how much of your portfolio has to be invested in each of the following asset categories:

Gambling: Gambling is fundamentally different from speculation and investment in the following respects:

GUIDELINES FOR AGGRESSIVE EOUITY INVESTORS

Aggressive equity investors play the equity game actively and vigorously. They spend more time and effort in managing their portfolio than their conservative counterparts. They are inclined to take greater risks, albeit in a calculated manner, to earn superior rates of return. They seem to relish the thrill and adventure of playing the equity game.

In addition to the general guidelines for investment, aggressive equity investors should also bear in mind the following guidelines especially relevant for them.

GUIDELINES FOR CONSERVATIVE EOUITY INVESTORS

Conservative equity investors seek to minimize investment risk as well as the time and effort devoted to portfolio management. What they want is peace of mind, not the adventure of aggressive investment. Satisfied with a reasonable return, they do not deliberately strive for spectacular gains.

In addition to the general guidelines for investment, conservative equity investors should also bear in mind the following guidelines especially applicable to them.

Avoid Certain Kinds of Shares

Experience suggests that the following kinds of shares are not suitable for conservative investors.

Shares of Unlisted companies There are more than 10,000 public limited companies in India. Only about 7000 of these are listed on the stock exchanges, the rest are not. Don't buy shares of unlisted companies. There 'is no organized market for them and there is no reliable way of assessing their market price. How does one find out whether a share is listed or not? It is very simple: a listed share is included in the quotation list of the stock exchanges where it is listed; an unlisted share is not included in the quotation list.

Inactively Traded Shares Listing does not ensure liquidity. A major bane of the Indian equity investors is that many listed shares are not actively traded. You should avoid such shares. To find out whether a share is actively traded or not, look at the frequency with which it has been traded in the last three months or so. If it is traded less than once in a week, it may be regarded as an inactively traded share.

Manipulated Shares Some business groups resort to manipulation of the shares of their companies. This mostly is in the form of market support to boost share prices, particularly before a public issue or rights issue. It can take other forms as well. Besides manipulating share prices, such groups also resort to 'creative accounting' meant to enhance reported profit artificially. As a general guideline, avoid such manipulated shares.

Cornered Shares Stock market operators engage in cornering operations from time to time. While such shares may excite aggressive investors, conservative investors, as a rule, should scrupulously avoid such shares.

Apply Stiff Screening Criteria

The conservative investor should consider only those shares in the secondary market, which satisfy stiff requirements. The screening criteria recommend are as follows:

Size The Company should not be very small. Its turnover should preferably be greater than Rs 10 crore and its equity base larger than Rs 2 crore.

Competitive Position The Company must have a reasonably strong competitive position. It should enjoy a respectable share of the market. Better still, it should have a market share that is growing.

Industry Prospects The prospects of the industry to which the company belongs must be above average. It should certainly not be an industry that is stagnating or declining.

Price-earnings Ratio The price-earnings ratio of the company must not be very high. As a general guideline, one has to be very cautious if the price-earnings ratio is more than 15 and or significantly higher than the industry average.

Dividend and Bonus Record The Company should have a reasonably good track record of dividend payment and bonus shares.

IMPLICATIONS OF VOLATILITY

Diversify: Keeping all your eggs in one basket may be risky. Spread the risk with a diversified portfolio of investments in different assets.

Don’t Overreach: Take only as much risk as you can afford. Do not invest in stocks using borrowed money.

Control Emotions: Don’t get overly worried by a sudden drop or too optimistic by a rally. Be objective and ignore market noise.

Reallocate: Your asset mix may have changed due to change in stock prices. Rebalance your portfolio to suit your investment profile.

COMMODITY TRADING

Lots of people have made huge profits in the commodity markets as it is one of the few investment areas where an individual with limited capital can make astonishing profits in a relatively short period of time. However, commodity trading has a bad reputation as being too risky for the average individual because most people lose money. The truth is that commodity trading is only as risky as you want to make it.

Those who want to earn quickly by trading are likely to lose because they have to take big risks. If you act cautiously, treat your trading like a business instead of a giant gambling casino and are prepared to settle for a reasonable return, the risks are acceptable. The possibility of success is excellent.

The method of trading commodities is also known as futures trading. Unlike other kinds of investments, such as stocks and bonds, you do not actually buy anything or own anything when you trade futures. You are just speculating on the future movement of the price in the commodity you are trading. This is like a bet on future price movement. The terms "buy" and "sell" only indicate the direction you expect future prices will take.

If, for instance, you were speculating in steel, you would buy a futures contract if you have a notion that the price would be going up in the future. You would sell a futures contract if you think that the price would go down. For every trade, there is always a buyer and a seller. Neither person has to own any steel to participate. He must only deposit sufficient capital with a brokerage firm to make sure that he will be able to pay the losses if his trades lose money.

Both the commodity's commercial producers and commercial consumers also participate in addition to speculators. The most important economic purpose of the futures markets for the commercial participants is that they can hedge their risk from changing prices.

On one side of a transaction may be a producer like a farmer. He has a field full of corn growing on his farm. It will be ready for harvest in another three months. If he is concerned about the price going down during that time, he can sell futures contracts equivalent to the size of his crop and deliver his corn to complete his obligation under the contract. Despite how the price of corn changes in the three months until his crop will be ready for delivery, he is definite to be paid the current price.

On the other side of the transaction might be a producer such as a cereal manufacturer who needs to buy lots of corn. The manufacturer may be concerned that in the next three months the price of corn will go up, and it will have to pay more than the current price. To protect against this, manufacturer can buy futures contracts at the current price. In three months manufacturer can fulfill its obligation under the contracts by taking delivery of the corn. This guarantees that regardless of how the price moves in the next three months, manufacturer will pay no more than the current price for its corn.

Also, there are futures for financial instruments and intangibles such as currencies, bonds and stock market indexes. Every futures market has producers and consumers who need to evade their risk from future price movements. The speculators deal in the physical commodities to provide liquidity. This maintains an orderly market where price changes from one trade to the next are small.

The speculator merely offsets his position at some time before the date set for future delivery rather than taking delivery or making delivery. If price has moved in the right direction, he will gain or vice versa.

Futures markets provide continuous, accurate, well-publicized price information and continuous liquid markets in addition to reducing the costs of production, marketing and processing. Futures trading is therefore valuable to the public which eventually consumes the goods traded in the futures markets. Without the speculator futures markets could not function.

Speculators earn substantial returns by performing the valuable functions of providing liquidity and assuming the risk of price fluctuation. The potentially large profits are available just because there is also a risk of huge loss.

Genesis of Commodity Trading

Commodity trading is nothing but trading in commodity derivatives (futures or options). In other words, if you are keen at taking a buy/sell position based on the future performance of commodities like gold, silver, agricultural commodities, metals, crude etc; then you could do so by trading in commodity derivatives.

Commodity derivatives are traded at the commodity exchanges. There are currently 2 major commodity exchanges NCDEX (National Commodity and Derivative Exchange) and MCX (Multi-Commodity Exchange). Gold, Silver, Agri-commodities including grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities that the exchanges deal in.

Earlier, all the sellers and buyers of a commodity used to come to a common market place for the trade. Buyer could judge the amount of produce that year while the seller could judge the amount of demand of the commodity. Thus they could dictate their terms and hence the counter party was left with no choice. Thus, in order to hedge from this unfavorable price movement, need of the commodity exchange was felt.

Commodity

A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities.

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. Of the country's GDP of Rs 13,20,730 crore (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent.

Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on.

Commodity Market

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

Historical background

From the beginning of civilization, commodities trading have turn out to be an important part in the lives of mankind. The reason for this is the fact that commodities symbolize the fundamental elements of utility for human beings. The term ‘commodity’ refers to any material, which can be bought and sold. Commodities in a market's context means any movable property other than actionable claims, money and securities. Over the years commodities markets have been experiencing tremendous progress, because the trade in this segment is standing as the bonus for the global economy today. The promising nature of these markets has made them an eye-catching investment avenue for investors.

In the early days people followed a mechanism for trading called Barter System, which involves exchange of goods for goods. This was the first form of trade between individuals. The absence of commonly accepted medium of exchange has initiated the need for Barter System. People used to buy those commodities which they lack and sell those commodities which are in excess with them. The commodities trade is believed to have its genesis in Sumeria. The early commodity contracts were carried out using clay tokens as medium of exchange. Animals are believed to be the first commodities, which were traded, between individuals. The internationalization of commodities trade can be better understood by observing the commodity market integration occurred after the European Voyages of Discovery. The development of international commodities trade is characterized by the increase in volumes of trade across the nations and the convergence and price related to the identical commodities at different markets. The major thrust for the commodities trade was provided by the changes in demand patterns, scarcity and the supply potential both within and across the nations.

Market Development

In the context of the development of commodities markets, integration plays a pivotal role in surmounting the barriers of trade. The development of trading mechanisms in the commodities market segment largely helped the integration of commodities markets. The major thrust for the integration of commodities trading was given by the European discoveries and the march of the world trade towards globalization. The commodities trade among different countries was originated much before the voyages of Columbus and Da Gama. During the first half of the second millennium India and China had trading arrangements with Southeast Asia, Eastern Europe, the Islamic countries and the Mediterranean. The advancements in shipping and other transport technologies had facilitated the growth of the trade in this segment. The unification of the Eurasian continent by the Mongols led to a wide transmission of people, ideas and goods. Later, the Black Death of 1340s, the killer plague that reduced the population of Europe and Middle East by one-third, has resulted in more per capita income for individuals and thus increased the demand for Eastern luxuries like precious stones, spices, ceramics and silks. This has augmented the supply of precious metals to the East. This entire scenario resulted in the increased reliance on Indian Ocean trade routes and stimulated the discovery of sea route to Asia.

The second half of the second millennium is characterized by the connectivity of the markets related to the Old and the New worlds. In the year 1571, the city of Manila was found, which linked the trade between America, Asia, Africa ad Europe. During the initial stages, because of the high transportation costs, preference of trade was given to those commodities, which had high value to weight ratio. In the aftermath of the discoveries huge volumes of silver was pumped into world trade. With the discovery of the Cape route, the Venetian and Egyptian dominance of spice exports was diluted. The introduction of New world crops into China has lead to the increased demand for silver and a growth in exports of tea and silk. Subsequently, Asia has become the prime trader of spices and silk and Americas became the prominent exporter of silver.

Earlier investors invested in those companies, which specialized in the production of commodities. This accounted for the indirect investments in commodity assets. But with the establishment of commodity exchanges, a shift in the investment patterns of individuals has occurred as investors started recognizing commodity investments as an alternative investment avenue. The establishment of these exchanges has benefited both the producers and traders in terms of reaping high profits and rationalizing transaction costs. Commodity exchanges play a vital role in ensuring transparency in transactions and disseminating prices. The commodity exchanges ensured the standard of trading by maintaining settlement guarantee funds and implementing stringent capital adequacy norms for brokers. In the light of these developments, various commodity based investment products were created to facilitate trading and risk management. The commodity based products offer a huge collection of benefits that include presenting risk-return trade-offs to investors and providing information on market trends and supporting in framing asset allocatment strategies. Commodity investments are always thought to be as defensive because during the inflation, which adversely affects the performance of stocks and bonds, commodities offer a defense to investors thus, maintaining the performance of their portfolios.

Derivatives

Another major leap in the development of commodities markets is the growth in commodities derivative segment. Derivatives are instruments whose value is determined based on the value of an underlying asset. Forwards, futures and options are some of the well-known derivatives instruments widely used by the traders in commodities markets. Derivatives trading have a long history. The first recorded incident of commodities trade was traced back to the times of ancient Greece. In the year 1688 De la Vega reported the trading in 'time bargains' which were the then commonly used terms for options and futures. Though the first recorded futures trade was found to have happened in Japan during the 17th century, evidences reveal that the trading in rice futures was existent in China, 6000 years ago. Derivatives are useful for both the producers and the traders for the mitigation of risk in their business. Trading in futures is an outcome of the mankind's efforts towards maintaining the supply balance of seasonal commodities throughout the year. Farmers derived the real benefits of derivatives contracts by assuring the prices they want to procure on their products. The volatility of prices has made the commodity derivatives not only significant risk hedging instruments but also strategic exchange traded assets. Slowly, traders and speculators, who never intended to take the delivery of goods, entered this segment. They traded in these instruments and made their margins by taking the advantage of price volatility in commodity markets.

The dawn of the 21st century brought back the good times for commodity markets. With the end of a 20 year bear market for commodities, following the global economic recovery and increased demand from China and other developing nations, has revitalized the charisma of commodities markets. According to the forecasts given by experts commodities markets are likely to experience a bright future with the depreciation in the value of financial assets. Furthermore, increasing global consumption, declining U.S. Dollar value, rising factor-input costs and the recent recovery of the market from the clutches of bear trend are considered to be the positive symptoms, which contribute to the acceleration of growth in commodity markets segment.

India Connection

Coming to the Indian scenario, despite a long history of commodity markets, commodity markets in India are still in their initial stages of development. The essential contributors of this scenario include stringent regulatory restrictions, intermediate ban on commodity trading and policy interventions by the government. Commodity markets have a enormous potential in the Indian market particularly because of the agri-based economy here. Because of the government's scheme for agricultural liberalization, commodities trading in India have gained increased force in activities. Forward Markets Commission (FMC), the governing body of commodities trading in India has taken several initiatives for the establishment of national level multi-commodity exchanges in India to boost the efficiency of the markets. These exchanges provide transparent trading, trading in multiple commodities, electronic delivery systems and efficient regulatory mechanisms creating a world class environment for Indian traders. The need for proper clearing and settlement systems, warehousing facilities and efficient pricing mechanisms has been identified in order to maintain the increasing volumes in commodities trade. With the recent boom in commodities markets, Indian market is gearing up for exploiting the possible opportunities in the future.

Commodity markets are of great help not only for their participants but also the economy as a whole. The twenty year bear market for commodities has drastically reduced the prices of many commodities to their lowest levels. The present shift in trend in commodity trading complimented by the global increase in demand will certainly hold a promising future for the investments in this segment. This book provides the impetus for the readers to understand the evolution and development of commodities markets and their significance in the arena of strategic investments.

Commodity derivatives trading in India, is governed by the Forward Contract (Regulation) Act, 1952, a Central Act. Various forms of contract are defined in the contract.

Ready delivery contracts are contracts for supply of goods and payment where both the delivery and payment is finished within 11 days from the date of the contract. Such type of contracts are outside the purview of the Act.

Forward contracts are for supply of goods and payment where supply of goods or payment, or both take place after 11 days from the date of contract or where delivery of goods is entirely dispensed with.

The forward contracts are categorized as specific delivery contracts and other than specific delivery contracts in which the specific delivery contracts are those where delivery of goods is compulsory though the delivery takes place after a period longer than 11 days. Specific delivery contracts are basically merchandising contracts entered into by the parties for real transactions in the commodity and the terms of contract may be drawn to meet specific needs of parties as against standardised terms in futures contracts.

The specific delivery contracts are again of two sub types, namely, the transportable variety where rights and obligations under the contracts are competent of being transferred and the non-transferable variety where rights and obligations are not transferable.

Futures contracts are standardized contracts in which the quantity, quality, date of maturity and place of delivery are all standardized and the parties to the contract only decide on the price and the number of units to be traded. Futures contracts are entered into through the Commodity Exchanges and are regulated by the provisions of the FC(R) Act. Options in goods means an agreement for the buying or sale of a right to buy or sell, or a right to buy and sell goods in future and includes a put, a call, or a put and call in goods but options in goods are currently banned under the Act. An Option Contract is the right but not the obligation to purchase or sell a certain commodity at a pre-arranged price called the "strike price" on or before a specific date. For this contract, the buyer or seller of the option has to pay a price called the premium to his counterpart at the time of contracting. If the option is not used, the premium is the maximum cost involved.

There are two broad categories of operators in the futures markets, called, hedgers and speculators. Hedgers are those who have an underlying interest in the specific delivery or ready delivery contracts and are using futures market to insure themselves against adverse price fluctuations. For example, stockist, exporters and producers. They require some people who are ready to acknowledge the counter party position. Speculators are those who may not have an interest in the ready contracts but see an opportunity of positive price movement for them. They provide depth and liquidity to the market and are prepared to assume the risk which the hedgers are trying to cover in the futures market.

Regulation

Various regulatory measures are prescribed by the Forward Markets Commission since futures trading has the risk of being misused by dishonest elements. It prevents an individual operator from over-trading limit on price fluctuation to prevent an unexpected upswing or downswing in prices, special margin deposits to be collected on outstanding purchases or sales to limit excessive speculative activity through financial restraints. Minimum and maximum prices given to prevent futures prices from falling below the levels that are unremunerative and from rising above the levels are not defensible by genuine supply and demand factors. The Commission even takes extreme steps like skipping trading in certain deliveries of the contract, closing the markets for a specified period and even closing out the contract to overcome emergency situations during times of shortages.

Considering the significance of agriculture in India’s GDP and the authentic requirements of promoting sound commodity futures markets in the country, a number of key reforms have been undertaken since the early 1990s.

These include formation of a separate Department of Consumer Affairs (1995) which has been in the front position for major initiatives in energizing commodity futures trading. Major efforts at reforming and strengthening the Commodity Exchanges (1996) such as broad basing the Board, computerization, professionalization and online trading are at diverse stages of implementation in various exchanges. The beginning of futures trading in edible oils, oilseeds and their cakes (1998) was a major milestone in the development of commodity futures contracts in India. Exchanges began trading in some of these oils and cakes in 2000. National Multi-Commodity Exchanges are being promoted. Two exchanges-Online Commodity Exchange of India Ltd., Ahmedabad and National Board of Trade, Indore have started working.

Clearly, the Government has taken a number of major reform initiatives for implementation and it is expected that the rest of the package will be in place in the next couple of years. Moreover, a number of measures have been taken in the real commodity sector for removing hindrances for free movement of goods, rationalizing tax structure, enhancing warehousing facilities and developing markets.

Collectively, these reforms put in place the important ingredients for the development of the commodity markets and futures transactions on modern lines. However, because of various lags between policies, execution and completion the full impact of these reforms is still not visible but should be clear in the next one to two years which will result in considerable changes in the area.

Trading in commodities futures is quite similar to equity futures trading. NCDEX and MCX are the two most popular national level online exchanges offering futures trading in commodities in India.

Commodity market is a promising avenue for your investments offering huge opportunities and enabling you to diversify your portfolio. With the least margin requirement being as low as Rs 10,000, it is suited for small investments also.

The following table illustrates what you could have earned on an investment made in commodities on a monthly basis.

Commodity

Strategy

Margin

Entry price on31stmarch

Exit price on 7th april

Profit

% Monthly Return

Guarseed

Buy

33,915

1,785

2,150

36,500

108

Chilli June

Sell

51,400

5,140

4,355

39,250

76

Silver June

Sell

88,200

19,600

17,600

60,000

68

Gold June

Sell

117,600

9,800

9,280

52,000

44

Chana June

Buy

41,225

2,425

2,580

15,500

38

Urad June

Buy

107,540

2,830

3,130

30,000

28

Turmeric June

Buy

34,950

2,330

2,410

8,000

23

Refined Soya oil June

Sell

37,530

417

409

8,000

21

Pepper June

Sell

8,578

6,599

6,434

1,650

19

Sugar June

Buy

22,980

1,915

1,950

3,500

15

Brent Crude June

Sell

42,926

3,302

3,265

3,700

9

Wheat June

Buy

8,720

872

878

600

7

Most of us have invested in gold; albeit keeping a long-term investment horizon in mind. To answer this question, we shall take an example of trading in gold futures and compare it with dealing in physical gold assuming that there would be some people still keen at taking a short-term view on Gold. For such investors, trading in gold futures will be beneficial.

Before going ahead with the example, it is important to visualize two different and distinct markets in existence. One market is where the gold is being traded. The demand and supply of gold in this market will determine the SPOT price of gold. The other market is where the gold future is traded. The demand and supply of gold future in this market will determine the FUTURE price of gold. To understand this further with an example Suppose in March 2008 you buy 1 kg Gold in the spot market at Rs 8045 per 10 gm amounting to a payout of Rs 8,04,500. In April 2008, you sell 1 kg gold in the spot market at Rs 9548 per 10 gm amounting to Rs 9,54,800.

Investment of 8,04,500 in spot market - Became - 9,54,800 in just 1 month i.e. around 18% return in one month.

However, it is worth noting that in the transactions above, you pay some amount for keeping the gold secure. Also, as you may be aware, selling gold instantaneously is a cumbersome process. Suppose in March 2008 you take a buy position in Gold Futures contract at Rs 8066 per 10 gm amounting to a payout of Margin 10% of Rs 8,06,600 i.e. Rs 80,660. (1 gold futures contract is equal to 1 kg)

In April 2006, you square off (sell) the same futures contract at Rs 9500 per 10 gm amounting to a gain of Rs 1, 43,400 per futures contract.

Investment of 80,660 in futures market - Became - 1, 43,400 in just 1 month i.e. around 178% return in one month.

Trading in physical gold

Trading in gold derivatives

Involves paying huge amount of money, as it has to cover the entire cost of the gold transacted.

Involves paying a small amount of money as it has to cover only a margin of 12-15% of the entire cost of the gold transacted.

Involves costs of keeping gold secure plus the worries and anxiety resulting out of efforts to keep gold safe.

ZERO such costs incurred.

Cumbersome to avail best price opportunities in market.

Very easy to avail best price opportunities in market

The market works like fire. A trader needs to be properly equipped before entering the arena, lest he burn his fingers. On the other hand, with proper skill sets and modern tools, a trader can use it to his advantage.

Proper strategies not only lead to wealth formation for the trader but also help the market to develop on a sustained basis. Vice versa, the lack of strategies leads to widespread value erosion, which results in people deserting the market after operating for a few months. Hence, in order to guarantee their own long-term continued existence, it is imperative that the markets impart knowledge to participants, concern them against possible bottlenecks and help them sharpen their trading skills.

Such a obligation is particularly more significant in case of the commodity exchanges, which have come into life recently but have already fascinated millions of traders and investors. In order to maintain the pace of growth, it is important to deliberate on the nature of trades, identify deficiencies in trading strategies that lead to trouncing of capital, and suggest likely solutions.

On a survey of few small traders in exchanges, it is interesting to note that many do not analyse the volatility of a commodity, leave alone work out strategies based on this.

Each underlying commodity has a different type of instability, which may be defined as the range within which the price of a commodity normally moves during a given time period.

The difference in volatility in different commodities is a function of:

It is significant for a trader to understand all this while determining the size of the position he ought to build. A common error many traders make is to establish the position size based on the margin of the commodity exchange. Two different commodities may attract the same margin, but the risk involved may not be the same vis-à-vis the same position value. Hence, though a trader may be right in taking a directional call, he may not be able to realize the full potential of that call due to inappropriate position sizing.

Therefore, it becomes vital for a trader to realize the inherent volatility of each commodity and as a result settle on the position size.

A trader should:

Let us say a trader wants to take a position worth Rs 30 lakh in commodities. He can take position in 3 lots gold of 1 kg each or 15 lots of copper of 1 metric tonne. The risks for the trader in these positions are totally different. Due to higher inherent volatility of copper prices, the trader is exposed to a higher risk in copper than gold. This is because the percentage movement in the price of copper on a daily basis is multiple times higher than gold.

Hence, if he takes a position of Rs 30 lakh in copper, after paying a margin of 7%, i.e., Rs 2.10 lakh, there is all probability that he may lose more than 50% of his capital of Rs 2.10 lakh due to a sudden movement of 3-4% in case of the price of copper. So, if a trader has a assets of Rs 2.10 lakh, it is advisable to take position of only Rs 10 lakh in copper contract, pay a margin of Rs 70,000 and set aside the residual Rs. 1.40 lakh for gathering the MTM calls. If the sizing of his positions in futures is calculated in such manner, he will have a better chance to get positive returns on his investment.

The problem starts when an investor with Rs 2.10 lakh capital approaches a broker and asks him how much position he can take. The broker looks at the exchange margin requirement and the margin percentage rather than inherent volatility of each commodity. The broker does not recommend him based on underlying volatility that equal position values in copper and gold are actually not equal in terms of their intrinsic risks.

Therefore, in order to make the most of returns, a trader should analyse the volatility of the relevant commodity in which he wants to take a call, and then decide on his position sizing. Higher the volatility, lower should be the size of his position, even if it means investing only a part of his capital towards margin.

To promote the idea of commodity trading as well as attain a high level of capability in the filed of commodity futures trading, the Exchange has introduced an online certification exam on commodity markets and derivatives (commodity module).

WHY COMMODITY TRADING

In an age, where the bank deposits provide a rate of return on investment which is even inferior than the rate of inflation, investment in commodity trading is a excellent option one can look at. However, before taking the plunge it is wise to know as to what is it all about.

Commodity trading is as knotty as any other investment, and requires as much, if not more research if you are not make a total mess of it. Commodity markets prosper when economies grow and at present India is at the wheel of a global economic boom. Soon, India will be an vital contributor to global commodity trade. Given the existing circumstances, commodity trading is all the more rewarding.

The last two and a half years have witnessed the commodity market getting far more regularized in India, with three fully automated exchanges operational now- the National Multi Commodity Exchange of India Ltd. (NMCE), the National Commodity & Derivatives Exchange Ltd. (NCDEX) and MCX.

At any point, there are three parallel contracts starting from the 21st of each month. If you enter the market on, say, June 26, you can purchase three futures- the July future, the August future and the September future – each priced differently. But you pay only a margin amount which varies according to the commodity.

The change in price is reflected in your margin account everyday. You make huge profits if the market always goes up, and the appreciation in the market is sufficient to cover your rollover costs. At the expiration of the contract period (one-three months), you can extract your net profit and take a fresh position or buy a new contract or you can terminate your contract before the due date, even on the day you take it.

If we take example of gold at say Rs 10,000 for 10 gm and pick up a kilogram of gold for Rs 10 lakh, one would pay Rs 70,000 upfront i.e 7% margin so, If the price goes up by Rs 2000 the next day, the difference of Rs 2000 is credited in the person’s account. Similarly, if the price falls by a thousand the next day, one is left with only Rs 1000 profit.

In commodities, the assets have physical need and consumption. Hence, price fluctuations are automatically checked. However, the commodity portfolio is more global than equity which means risks may emanate from Sydney or Chicago and not only from India. Moreover there are rupee and dollar rates to monitor.

The fact is nobody can predict markets. If you’ve earmarked money for investment in the market, it would be a good idea to split it between equity and commodities. After all, you put up only a percentage of the full value as margin, but your profits ride on the full value.

FUNDAMENTALS OF COMMODITIES TRADING

The investment environment for long consisted of stocks, bonds, fixed deposits, mutual funds, jewellery and real estate but because of the lifting of the 30-year ban on commodity futures trading in India, yet another avenue for investors has opened.

Commodity futures are traded in commodity exchanges and online exchanges such as the Multi Commodity Exchange (MCX), the National Commodity and Derivatives Exchange (NCDEX), the National Multi-Commodity Exchange (NMCE) and the National Board of Trade (NBoT) in India.

The NCDEX and the MCX are situated in Mumbai, the NMCE in Ahmedabad and the NBoT in Indore and are promoted by leading banks. The National Commodity and Derivatives Exchange is co-promoted by the NSE; the Multi Commodity Exchange by the SBI group; and the National Multi-Commodity Exchange by the Central Warehousing Corporation. Various stockbrokers provide commodity trading services.

Investors have to open a trading account with a broker or sub-broker and submit the documents establishing address and identity proof. While brokers differ on the documents required for proof, most persist on a PAN card as proof of photo identity.

The Forward Markets Commission approves commodities that can be traded in the market. Commodities which are available for trading include bullion — gold and silver; metals — steel, copper, aluminium, lead and nickel; crude; and various agri commodities. However, not all commodities are traded on all these exchanges like crude, gold and silver are highly traded on the MCX, agri commodities are traded more on the NMCE and the NCDEX.

Commodity future contracts are tradable standardized contracts where the terms and conditions are set in advance by the exchanges regulating the trade.

A contract can have different lot size and a delivery size like in the case of gold, the lot size on the NCDEX is 100 gm while the delivery size is 1000 gm. Suppose, a person wants to enter into a delivery settlement for gold, he will have to enter into a minimum of 10 contracts or multiples thereof. Market participants have to negotiate only the quantity and price of the contract, as all other parameters are fixed by the exchange.

A settlement is done either through squaring off your position or by cash settlement or physical delivery. Squaring off is taking a opposing position to the initial position, which means that in the case of an original buy contract an investor would have to take a sell contract.

An investor who intends to give or take delivery will have to inform his broker of the same, preceding to the start of delivery period.

Delivery is at the option of the seller as the buyer can take delivery only in case of a willing seller. All open positions for which no delivery information is submitted are also cash settled; all unmatched/rejected/excess positions are cash settled. The difference between the contract price and settlement price is to be paid or received under cash settlement,.

Contrasting to the stock markets that close by 3-30 p.m., the NMCE is open till 8.00 p.m. and the MCX and the NCDEX till 11.00 p.m. Though, only crude and metals are traded in the night sessions. This allows the working people to place orders from their homes.

Contract duration in case of commodity futures vary, and in some instances extend up to six months unlike equity futures, which have a life cycle of three months.

Market participants can hedge their position over a longer period. Commodity futures are also easy to operate in as compared to equity futures, as one has to just keep track of demand and supply and not the a number of financial metrics that the equity futures calls for.

Sales tax is valid only when a contract results in delivery.

Investors have to maintain margins and top up their accounts on a daily basis which is called marked-to-market margin for fluctuations based on the tick size. Margins have different components and in case of delivery settlements there is an additional delivery margin that has to be maintained once the contract enters the delivery period.

Intended seller who has to give delivery would have to approach the qualified warehouse for availability of space, who certifies the quality of the goods. The goods have to meet the pre-set quality specifications.

The seller has to tolerate storage charges until the date of demat credit, loading/unloading and all other incidental charges etc.

A buyer intending to take physical delivery has to request his broker and then the buyer has to approach the warehouse with the document (re-materialization form or the warehouse receipt).

It is also possible to take fractional delivery of the commodities from the warehouse. All accompanying charges pertaining to taking delivery are to be borne by the buyer.

The Central Government under the Forward Contracts (Regulation) Act and the Forward Contract Regulation Rules regulate the commodity futures and the relevant exchanges. FMC regulates the futures market in commodities.

The risk perception is beginning to heighten as funds flawlessly flow from one market to the other and the Indian commodity market begins to amalgamate with the international market. Acceptance of risk management or risk easing tools is now sine qua non for success in businesses with exposure to commodities. A grim look at futures trading as a tool for price discovery and price risk management is expected.

Before we look at commodities futures trading — its ideology and benefits — it may be valuable to crystal gaze into the future of this market. Some features of the rising scenario in India as far as the commodity market is concerned -

Development of commodity trade: Demand for a broad variety of commodities covering food, fibre, metals and energy is assured to expand and as investment in production facility expands, India is expected to produce many of the aforementioned commodities. Imports will become inevitable, if demand growth outstrips domestic supply growth. The likelihood of exporting certain commodities also exists. India will become an important player in the international market in commodity production, consumption and trade. This will lead to a enormous expansion in commodity trade volumes over the next 10-15 years.

Fight from imports: The competition from imported commodities is unavoidable and it could be true in case of food crops, metals and energy. In the short/medium-term, local output will follow consumption demand because of the lagged effect of investment. The government and the business houses will have to resort to imports to fuel growth and rein in inflation. As imports are unrestricted because quantitative restrictions have been abolished, there will be freethinking inflow of goods from abroad and often imports from developed countries are economical and subsidized. Such competition will lead to incompetent domestic units diminishing by the wayside but will finally lead to better effectiveness among domestic producers.

Function of MNCs: Multinational companies cannot be washed away as they bring with them a definite advanced knowledge of working in developing or promising economies. They are long-term players and also have deep pockets. In the Indian commodities sector, global companies will play a greater role as producers, suppliers, traders and service providers. Indian producers will have to learn to tackle competition from MNCs.

Consolidation of disjointed capacities: It is renowned that commodity producers and industrial consumers in India experience poor scale economies because of their small size. Breakup of business that is resulting in scale-diseconomies and other infirmities is likely to give way to consolidation.

Competition is now motivating smaller players to explore opportunities for merger and larger companies with expansion plans are following the acquisition route. Mergers and acquisitions will slowly lead to consolidation of fragmented businesses.

Supremacy by a few big firms: A handful of companies share a big slice of the business pie in the developed economies. Typically, four-five companies would account for approximately, 65-80 per cent of aggregate business and several smaller players compete for the rest. The commodity sector will certainly move towards such a situation. Although, just beginning the process of consolidation and dominance by a few large firms is already visible. For instance, take edible oil imports. Of the total imports of 40-55 lakh tonnes a year worth over Rs 10000 crore, five companies of which two are MNCs account for almost 70 per cent of business and the rest being shared by over 20 importers.

Fading role of government: The Government has not only unchained the commodities market of controls and limitations but has also, by and large, distanced itself from the market as part of the economic liberalisation process. The dominant role of the government is now negligible. The role of the government is changing from controller to facilitator

Utilization of information technology: Information Technology will play a key role in bringing about greater clearness in the commodities market and the country's strengths in IT will be leveraged to connect stakeholders and link markets gradually.

E-commerce will be the contemporary way of doing business. Numerous companies have already begun to employ IT to derive value. For example - ITC's e-chaupal being a remarkable initiative. The agricultural produce markets of nearly 7,500 across the country will soon be networked so that growers can get to identify prices prevailing in various marketing yards or mandis.

Strong cash market: Initiatives are already in progress to commence electronic spot trading in farm commodities so as to help growers and others to not only determine prices almost real time, but also help capture value by taking trading positions. A strong and lively cash market is a pre-condition for a flourishing and transparent futures market.

TECHNICAL ANALYSIS OF TRADE TRANSACTIONS

COMMODITY

Contract

Trading Strategy

ENTRY

TARGET

STOP LOSS

GOLD (GLDPURMMK)

NCDEX July

Buy

Above 8690

8730-8765

8658

SILVER (SLVPURDEL)

NCDEX July

Buy

Above 17985

18125-18230

17880

BRENT CRUDE (BRENTCRUDE)

NCDEX July

Buy

Above 2900

2930-2955

2868

CHANA (CHARJDDEL)

NCDEX July

Sell

Below 2286

2264-2255

2302

GUARSEED  (GARSEDJDR)

NCDEX July

Sell

Below 1755

1728-1714

1767

TURMERIC (TMCFGRNZM)

NCDEX July

Sell

Below 2151

2133-2115

2163

BLACK PEPPER (PPRMLGKOC)

NCDEX July

Buy

Above 13830

14052-14211

13674

CHILLI (CHLL334GTR)

NCDEX July

Buy

Above 4690

4780-4840

4622

JEERA (JEERAUNJHA)

NCDEX July

Buy

Above 13150

13350-13530

13001

MENTHA OIL (MTHOILCHD)

NCDEX July

Stay away

Soyoil (SOYREFIDR)

NCDEX July

Buy

Above 484.0

486.5-488.0

482.7

Soybean (SYBEANIDR)

NCDEX July

Buy

Above 1533.0

1541.0-1547

1526

Rapeseed (RMSEEDJPR)

NCDEX June

Buy

Above 415.0

417.5-419.0

412.8

Futures trading in commodities results in transparent and fair price discovery on account of large scale participations of entities associated with different value chains and reflects views and expectations of wider section of people related to that commodities. This also provides effective platform for price risk management for all segments of players ranging from the producers, the traders, processors, exporters/importers and the end users of the commodity. The trading on futures contract on our platform will be facilitated on an online platform for market participants to trade in a wide range of commodity derivatives driven by the best global practices of professionalism and transparencies.

COMMODITY VERSUS EQUITY – PERFORMANCE

Structure of Commodity Market

Different types of commodities traded

World-over one will find that a market exits for almost all the commodities known to us. These commodities can be broadly classified into the following:

Different segments in Commodities market

The commodities market exits in two distinct forms namely the Over the Counter (OTC) market and the Exchange based market. Also, as in equities, there exists the spot and the derivatives segment. The spot markets are essentially over the counter markets and the participation is restricted to people who are involved with that commodity say the farmer, processor, wholesaler etc. Derivative trading takes place through exchange-based markets with standardized contracts, settlements etc.

Leading commodity markets of world

Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX), the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT).

Leading commodity markets of India

The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. These exchanges are expected to offer a nation-wide anonymous, order driven, screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges.

Consequently four commodity exchanges have been approved to commence business in this regard. They are:

Multi Commodity Exchange (MCX) located at Mumbai. National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai. National Board of Trade (NBOT) located at Indore. National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Turnover on Commodity Futures Markets

(Rs. In Crores)

Exchange

2005-06

2006-07

NCDEX

1490

54011

NBOT

53014

51038

MCX

2456

30695

NMCE

23842

7943

ALL EXCHANGES

129364

170720

Volumes in Commodity Derivatives Worldwide

COMMODITY MARKET PERFORMANCE – AUGUST 2007

Major commodities were buoyed in the last two weeks of August 2007 after a panic wave of risk aversion hit global financial markets on worries of the US sub-prime mortgage lending jitters spreading across the world. As result, hard assets like precious metals, industrial metals as well as crude oil witnessed across-the-board sell-off. However, injection of liquidity by central banks and increasing expectation that the US Federal Reserve would cut interest rates in its upcoming policy meeting on 18 September 2007 spurred interest in risky assets. A measured pullback was witnessed in metals and energy counters on these cues, while agri commodities displayed volatility, making the overall movement on the commodity street mixed in the fortnight ended 1 September 2007.

Precious Metals

The turmoil in the global financial markets took the glitter off gold futures in the third week of August 2007, placing the commodity in the risky-asset category. A swift fall in crude oil prices, an impressive spurt in the US dollar and the panic wave of risk aversion pushed down the New York Mercantile Exchange's (Nymex) Comex gold futures for December 2007 in sync with other risky asset classes. The counter slid to $652 per ounce on 16 August 2007 — its lowest level in the last six weeks. This denoted a fall of nearly $24 in a single session for the yellow metal.

Silver futures for September 2007 delivery also dropped more than one dollar in intraday trades to hit $11.495 an ounce on the Comex — the lowest since October 2006.

The currency markets shaped up the severe dip in gold prices as the yen headed for its biggest weekly gain in almost nine years and global equities tumbled with investors' fleeing high-yielding or riskier assets funded by loans taken in Japan's currency.

However, on 17 August 2007, the US Fed cut interest rates charged on loans to banks by a half a percentage point to 5.75% to calm the turmoil in the credit market, following a long slide of more than 1,100 points of the Dow Jones Industrial Average over the previous one month. The greenback fell soon after as market participants speculated on the chances of an interest-rate cut by the US central bank in its next meet on 18 September 2007 to reduce the dollar's yield advantage against other currencies.

This spurred the yellow metal, as risky assets drove higher. Assisted by cues that the Fed's stance of holding its benchmark interest rates at the current level of 5.25 is easing, the Comex gold futures advanced to a three-week high of $683.9 on 31 August 2007.

On the domestic bourses, sentiments for precious metals complex remained weak. But the erosion in the value of the Indian rupee kept the downslide limited for the yellow metal in the third week of August 2007. The partially convertible Indian currency dipped to its lowest level of 41.71 on 16 August 2007 as the domestic equity markets suffered heavy losses, causing huge fund outflow. A weakness in the Indian rupee is seen supportive for gold in the local markets as India imports most of its domestic gold requirement from overseas.

Thus, the benchmark October 2007 futures on the Multi Commodity Exchange (MCX) ended at Rs 8936 per 10 gram on 31 August — the highest closing in the last eight weeks.

Trading Idea:The $680-$690 band has proved to be a tough resistance zone for international gold futures this year. The yellow metal failed to break it for the third time this year in the first week of August 2007. Gold just seems to be chopping in no-man's land. The sentiment is likely to remain choppy until the market gets complete reassurance that the sub prime crisis has been averted.

In the international arena, a break above the $690 level would put the yellow metal in for a test as the previous high of $696, hit on 24 July 2007, may prove a tough resistance.

Base Metals

The base metals complex witnessed a frantic sell-off in the third week of August 2007 as all the risky asset classes came under intense pressure from rising risk aversion and a slump in the global equities market. The metal-specific action was no different as market participants sidelined fundamentals.

Copper: After plummeting in the third week of August 2007 amid turmoil in the global markets, copper staged a moderate comeback in the next two weeks. The sentiment in copper prices, however, was hurt by a surge in inventories on the London Metal Exchange (LME). Copper inventories on LME increased 35% to 1,39,425 tonnes during August 2007. LME copper ended at $7524 per tone for delivery in three months, gaining 8.10% in the fortnight. The upturn in prices can be halted in the coming weeks if inventories continue to pile up at a similar pace.

Aluminum: Aluminum prices fell in line with other metals with no support emerging. The commodity also slipped on concerns of rising global supplies: World aluminum inventories rose to 2.841 million tonnes in July 2007 as against 2.798 million tonnes in June 2007, the International Aluminum Institute said in its latest update. However, buoyed by the recovery in risky assets along with the falling LME inventories (shedding 1.40% in August 2007), LME aluminum ended at $2497 per tonne, adding 3.20% in the fortnight.

Zinc: Zinc prices rebounded in the second half of August 2007 on fundamentally sound scenario coupled with robustness in global equities and the overall metals space. Stocks of zinc, on the decline since 2004, fell 26% since the start of this year and stood at 65,000 tonnes on 31 August 2007, indicating that the bounce back in the metals complex would be extended further for zinc.

Nickel: Nickel has been the worst hit among industrial metals in the current year and the recent sell-off amplified the slump in the commodity. The commodity had hit an all-time high of US$ 54,200 per tonne on 16 May 2007. A free fall in the prices from this level accounted for a more than 50% drop in a span of less than three months as rising LME inventories and a surplus in the global production made the commodity pare most of its earlier gains in the year. Inventories of the metal stood at 24,126 tonnes — the highest level for the last year-and-a-half on 31 August 2007.

Trading idea:The near term rebound in metal prices was based on the idea that the US Fed would lower the rates in its next meet to be held on 18 September. While this has spurred the global equity markets, the metals also followed suit, continuing a pattern characteristic of the price action in all the risky assets these days.

However, from here on, a mixed movement can be expected as the financial markets should trade in choppy waters ahead of the all-important Federal Open Market Committee (FOMC) meet. The next important data release (US non-farm payrolls) is likely to give clear direction about the Fed's action. Metals should witnesses some volatile moves following the numbers.

Rising LME inventories and the dire state of US housing may keep the upside limited for metals, particularly copper. The US Commerce Department data show that US housing starts (new building developments) fell over 6% to 1.381 million on 31 July 2007 from 1.470 million the month before, raising concerns that the beleaguered US housing market is far from bottoming out. The US construction and housing industry accounts for 43% of the US copper demand, according to figures from the International Copper Study Group (ICSG).

Crude oil:

Like other commodities, energy prices also came under sustained selling pressure after hitting an all-time high of $78.77 per barrel on 1 August 2007. The commodity eased afterwards on profit booking and expectation of the US gasoline demand casing as the summer season neared its end. The light, sweet crude oil for October 2007 delivery declined to $69.26 — its lowest level in last six months — on a hefty sell-off as the US sub-prime crisis took its toll on risky assets.

Afterwards, concerns of the hurricane season in the US affecting supplies from oilfields in the Gulf of Mexico kept the commodity supported. The US GDP in the second quarter of calendar year 2007 was also revised upwards to 4%, providing a further boost to the commodity. The October 2007 futures on the Nymex ended at $74.04 on 31 August 2007 — gaining 2.86% in the fortnight.

Trading idea:Crude oil prices are likely to find the going tough in the next few weeks as they approach all-time high levels. The Organisation of Petroleum Exporting Countries, cutting supply, by 1.7 million barrels a day in the past year, will probably keep production unchanged at its next meeting in Vienna on 11 September 2007. This should keep the commodity supported. Updates from activity in the Gulf of Mexico may keep the commodity in a broad range of $70 -$75 in the coming weeks.

Agri Commodities:

Festive demand is likely to push up prices of chana in the next few weeks after a quiet spell over the last two months. Spot prices of chana hovered around the Rs 2300 levels in the last week of August 2007, showing signs of some consolidation. The average price of chana was Rs 2323 per quintal in Delhi in August 2007 — a fall of 10% over August 2006. A substantial increase in the area under pulses in the kharif season (April-September) kept the upside capped for the commodity.

As per the latest updates, pulses cover an area of 115.3 lakh hectares against 108.3 lakh hectares this time last year—up 6.46%. This may ensure that any spikes in pulses are short-lived.

The benchmark chana futures ended at Rs 2261 — down 6.28% — on the National Commodity and Derivatives Exchange (Ncdex) in the fortnight, with continued increase in open interest, suggesting short-selling in the counter.

Oilseeds: With an increase in the acreage of major oilseeds, sentiments reversed in August 2007 as most of the kharif sowing got over. The total coverage of oilseeds so far has been 170.15 lakh hectares compared with 156.42 lakh hectares on 30 August 2006 — a surge of 8.77% — as farmers increased the acreage of all major oilseeds in view of the stellar gains recorded by prices in the last one year.

Major oilseeds like castor and RM seed are likely to come under sustained selling pressure. The benchmark futures in both these commodities displayed a mixed trend and any spurts should be short-lived in the next few weeks.

Sugar: Sugar prices slid in August 2007 on expectation of bumper production for the second year in a row. Sugarcane coverage stood at 51.04 lakh hectares compared with 48.32 lakh hectares on 31 August 2006.

The latest report from the Food and Agriculture Organisation (FAO) suggests that rising global demand for sugar is set to be met by increase in production, leading to a more stable market and prices. The report noted that although the sugar market, like the markets for other agricultural commodities, has been squeezed by a growing demand for ethanol, supply and price of sugar is expected to stabilise.

This confirmed that the supply glut that has pulled the commodity down by more than 25% in the last one year in the domestic and global markets would continue to linger. The Ncdex December 2007 futures, with the maximum open interest, continue to trade at a discount to the spot prices, indicating softness will prevail in the commodity in the near term.

Soy Complex: Refined soy oil futures topped out in the last week of July 2007 and eased on sustained profit selling afterwards. Market participants also pushed back from entering on the long side on expectation of the current kharif season providing a bounty in the output of major oilseeds, particularly, soybeans. While the total coverage of oilseeds has gone up, soyabean has been sown in 9% more area compared with that in 2006.

The commodity is likely to trade weak on expectation of palm oil prices easing in the coming months as Malaysia, the second largest palm oil producer in the world, enters its peak output season. The latest updates are in favor of continued softness. The Malaysian Palm Oil Board has stated that crude palm oil production increased 16.3% to 1.356 million tonnes in July 2007 from June 2007.

This may substantially curb the pace of Indian crude palm-oil imports in the corning months. India, the world's second-biggest buyer of palm oil, increased imports by 32% to 1.95 million tonnes in the eight months ended 30 June 2007 from a year earlier.

Guar Complex: A seasonal downturn was witnessed in guar seed as well as guar gum prices in August 2007. Guar seed, a drought tolerant annual legume crop, is mainly cultivated in the northern parts of India as a kharif crop. Guar seed is a rain-fed monsoon crop, normally sown in the second half of July 2007 up to early August 2007 after the monsoon rainfall starts, and harvested in October and November.

Prices of guar seed and guar gum started easing in the futures as well as the spot markets from the middle of June 2007 and plummeted in the last week of August 2007 after detection of toxic chemicals in guar exported to the European Union.

Trading idea:Soy complex futures are likely to continue to move downwards with selling pressure emerging at every moderate spurt in the soybean as well as refined soy oil futures. A moderate rebound can be witnessed in chana prices, though the quantum should be limited given the expected surge in the overall output of pulses.

The southwest monsoon's performance has been a big factor boosting acreages for all major kharif commodities, keeping the undertone soft in the spot as well as futures markets. According to the India Meteorological Department (IMD), the country received an area-weighted rainfall of 715.3 millimeters (mm) in the current monsoon season (June-September) till August 28. This is 1.6% higher than the 'normal' long-period average of 703.9mm in this period.

STOCK MARKET PERFFORMANCE

The market staged a remarkable turnaround last fortnight as fund-flushed domestic institutions stepped up buying. Expectation that the US Federal Reserve may cut key interest rate and short covering ahead of the expiry of August 2007 derivatives contracts triggered a rebound on domestic bourses. But a high-voltage political drama ensured that volatility remained high.

The market is expecting the US Federal Reserve to reduce interest rate at its 18 September 2007 meeting. The US central bank on 17 August 2007 cut the discount rate at which it lends to banks by a half-percentage point to 5.75% in a bid to help counter the credit-market turmoil. This measure led to a rebound in the global equity markets.

Interest-rate-sensitive banking and auto shares firmed up on the reckoning that the Reserve Bank of India (RBI) may not further tighten interest rates in the event Fed cuts rates. Blue chips bounced back consequently.

Political worries eased a bit after the Left parties said it was not their intention to topple the Central government over the Indo-US nuclear deal. The government on 30 August 2007 put on hold the operationalisation of the nuclear deal pending the findings of a committee constituted to go into the objections raised by the Left parties.

The market had tumbled in the first half of August 2007 as foreign institutional investors (FIIs) dumped stocks due to redemption pressure back at home in the aftermath of the defaults in the US subprime mortgage market. Political uncertainty had accelerated the fall following the Left Front's opposition to the nuclear deal. This stoked fears that the Communist allies of the ruling UFA coalition government at the Centre may pull their support, triggering mid-term polls. After staging a solid recovery in April 2007, the Indian market had consolidated from early May 2007 till mid-June 2007. Thereafter it witnessed a solid surge in June-July 2007. The broad market index had started climbing up since mid-June 2007, ahead of the onset of the June 2007 quarter (Q1) earning reporting season. The rally had gathered strength later as earning came in strong. From 14,003.03 on 13 June 2007, the benchmark index had surged 1,791.89 points, or 12.79%, to a lifetime closing high of 15,794.92 on 24 July 2007.

Factors that have been affected the stock market to a great extent:

SENSEX SENSITIVITY

Event

Year

Movement in Sensex (points)

Movement in Sensex (% change)

Turnaround time (No. of days)

Rajiv Gandhi assassination

1991

-5

-0.4

1

Ayodhya demolition

1992

-146

-5.4

3

Mumbai riots begin

1993

-52

-2.1

1

Mumbai blasts

1993

60

1.3

NA

Nuclear explosion

1998

-77

-1.9

1

Orissa cyclone

1999

-175

-3.9

1

Earthquake in Gujarat

2001

-95

-2.2

1

Parliament suicide attack

2001

-35

-1.0

1

Godhra train incident

2002

-144

-3.9

1

Mumbai car bomb explosions

2003

148

3.6

NA

Iraq war starts

2003

207

2.1

NA

Tsunami strike

2004

15

0.2

NA

Mumbai floods

2005

53

0.7

NA

NA : Not Applicable since the Sensex had moved up when the incident occurred

Some of the key takeaways in the fortnight ended 31 August 2007 were:

Index movements

Benchmarks: The BSE 30-share Sensex gained 1,177.08 points, or 8.32%, to settle at 15,318.60 in the fortnight ended 31 August 2007. The S&P CNX Nifty advanced 355.95 points, or 8.66%, to end at 4,464. Niche Indices: The BSE Small-Cap index soared 365.72 points, or 4.75%, to 8,060.52 in the fortnight, while the BSE Mid-Cap index climbed up 348.95 points, or 5.57%, to 6608.42.

The fortnight that was

20 August: The Sensex jumped 286.03 points, or 2.02%, to 14,427.55. The domestic market rebounded after posting three straight sessions of losses as global markets reversed their falling trend. However, the turnover was low. Short covering also propelled local bourses.

21 August: The Sensex lost 438^44 points, or 3.04%, to 13,989.11 on concerns arising from the fluid political situation in New Delhi, with the prospect of a general election looming large.

22 August: The Sensex gained 259.55 points, or 1.86%, to 14,248.66. The market saw a series of wild swings in first half of the day amid negative bias. But it soared in the second half on value buying coupled with short covering. Strong Asian and European markets boosted local bourses further.

23 August: The Sensex declined 84.68 points, or 0.59%, to 14,163.98. Boosted by strong Asian and European markets, the market was firm till early afternoon trade. It, however, faltered in afternoon trade on a sudden sell-off due to political uncertainties.

24 August: The Sensex was up 260.89 points, or 1.84%, to 14,424.87. The market surged in the second half of the trading session as fears of immediate elections eased after India's biggest communist party, Communists Party of India (Marxists), or CPM, said after trading hours on 23 August 2007 it does not want to pull down the government over a nuclear deal with the US. The market saw a bout of volatility. Despite the rally, the turnover was dull.

27 August: The Sensex surged 417.51 points, or 2.89%, to 14,842.38. The momentum was derived from the rally on Wall Street on 24 August 2007, triggered by surprisingly strong data on US home sales and durable goods. Also short covering ahead of the expiry of derivatives contracts for August 2007 series aided the market's rise.

28 August: The Sensex scaled up 76.81 points, or 0.52%, to 14,919.19. The market settled with decent gains as buying emerged in index pivotals. IT pivotals led the rally along with index heavyweight Reliance In dustries (RIL). Yet, weak global markets capped upside. On the flip side, value buying coupled with short covering provided support at lower level.

29 August: The Sensex advanced 73.85 points, or 0.50%, to 14,993.04. The market staged a comeback from the day's low touched in early trade following the drop in US stocks over night, driven by credit concerns. The market rebounded on value buying coupled with short covering in the derivatives market.

30 August: The Sensex rose 128.70 points, or 0.86%, to 15,121.74. The market settled with gains for the fourth straight session on continued buying in index pivotals. It saw volatile swings at the end of the day, after staying firm throughout the day. The mar ket had opening on a firm note as US stocks rallied overnight on expectation that the US Federal Reserve would cut rates in September 2007 to cushion the impact of the subprime crisis on the broader US economy.

31 August: The Sensex surged 196.86 points, or 1.3%, to 15,318.60. The market rallied for the fifth straight session as investors flocked to index pivotals. Data showing robust GDP growth in the April-June 2007 quarter, declining inflation, easing political worries and firm Asian and European markets boosted sentiment. All the sectoral indices on BSE posted gains.

Institutional activity

FIIs: FIIs bought shares in five of the nine trading sessions from 20 to 30 August 2007. They were net buyers of shares worth Rs 870.60 crore in those nine trading sessions, when the market had bounced back from a steep fall.

Mutual funds: Mutual funds are sitting on cash partly due to collections from new fund offers in the past few months. They deployed some of the cash into the market. Mutual funds were net buyers of shares of Rs 2012.50 crore in nine trading sessions from 20 to 30 August 2007.

Sensex Snapshot

Var(%)*

Current (31 August 07)

15,31,8.60

Lifetime high (24 July-07)

15,868.85

–3.46

End of calendar 2006

13,786.91

11.10

One-year ago (31 August 06)

11,699.05

30.93

* As on 31 August 2007

How the indices have fared

Variation over (%)

31-August 07

Fortnight

Month

Quarter

Year

BSE 30

15318.60

8.3

-15

5.3

30.9

NIFTY (S&PCNX)

4464.00

8.7

-1.4

3.9

30.8

BSE 500

5950.11

7.6

-1.9

5.4

34.5

BSE IT Sector

4585.66

1.9

-5.7

-5.5

7.0

BSE FMCG Sector

1973.93

9.0

0.0

3.5

-2.7

BSE Capital Goods

13424.74

11.6

0.8

20.4

74.0

BSEHealthcare

3572.82

2.5

-3.9

-7.0

1.0

BSE PSU

7095.44

8.4

-0.9

5.3

27.7

BANKEX

7858.79

6.9

-3.6

3.3

48.1

CNXIT

4813.20

2.3

-5.4

-7.8

8.3

BSE Auto

4878.05

7.0

-1,1

-2.7

-1.4

BSE Metal

11565.81

17.9

-0.6

11.1

42.9

BSE Oil&Gas

8160.13

9.9

0.4

4.7

44.1

BSE Mid-Cap

6608.42

5.6

-1.6

62

37.7

BSE Small-Cap

8060.52

4.8

-0.1

8.7

39.5

FIIS trade, MFs Buy

Institutional investment in Rs. Crore

FII

MF

20 Aug 07

92.8

152.3

21 Aug 07

-9.8

-16.5

22 Aug 07

-668.1

211.6

23 Aug 07

330.4

331.4

24 Aug 07

414.5

84.7

27 Aug 07

1201.8

345.4

28 Aug 07

365.6

45.9

29 Aug 07

-192.1

59.8

30 Aug 07

-664.5

726.4

Movement of the Sensex Stocks

31/08/07

17/08/07

VAR(%)

Tata Steel

689.70

544.30

26.7

8MB.

1889.15

1558.85

21.2

H indalco Industries

157.90

140.00

12.8

ACC

1065.90

951.75

12.0

Larsen 8 Toubro

2582.75

2305.15

12.0

Reliance industries

1959.50

1752.80

11.8

ManrtiUdyog

868.20

780.05

11.3

ITC

170.55

153.35

11.2

Ranbaxy Lab.

391.30

352.60

11.0

BtiartiAirtel

879.90

794.50

10.7

Reliance Commn

543.00

493.45

10.0

ONGC

857.55

782.70

9.6

Tata Motors

701.85

641.20

9.5

HDFCBank

1171.30

1069.25

9.5

Mahindra & Mahmdra

709.05

649.95

9.1

Hindustan Unilever

208.60

192.20

8.5

Reliance Energy

779.75

719.35

8.4

Grasim Industries

2935.60

2739.35

7.2

ICICI Bank

884.65

825.95

7.1

NTPC

173.30

163.00

6.3

Ambuja Cements

133.45

126.70

5.3

State Bank of India

1599.50

1519.50

5.3

Bajaj Auto

2345.10

2251.00

4.2

HDFC

1976.00

1910.05

3.5

DrReddy'slab.

640.80

621.60

3.1

Satyam Computer

447.35

44020

1.6

Wipro

482.25

475.50

1.4

Tata Consultancy

1065.00

1056.10

0.8

InfosysTech

1855.05

1854.80

0.0

Cipb

167.35

183.35

-8.7

Figures in Rs

THE YEAR TO DATE

Top Gainer

NAME

Price 31/08/07 (Rs)

Var.(%) Over 31/08/06 price

A

GMR Infrastructure

806.80

275.96

Weispun Gujarat Stahl Rohren

247.35

236.07

Adani Enterprises

342.05

185.52

Alstom Projects India

751.65

174.68

Gujarat Mineral Dev. Corp.

911.70

165.72

B1

Kaashyap Technologies

5.03

3492.86

IFCI

65.25

593.41

Tele Data Informatics

68.20

589.59

Goldstone Technologies

133.90

522.79

Educomp Solutions

2856.80

458.62

B2

Innovative Foods

65.31

2995.26

Wearology

196.35

1473.32

Alchemist Realty

292.00

1233.33

Dhampure Speciality Sugars

126.65

1185.79

Shyam Star Gems

87.90

1125.94

Top Losers

NAME

Price 31/08/07 (Rs)

Var.(%) Over 31/08/06 price

A

Raymond

258.05

-40.48

Novartis India

292.00

-37.10

Hinduja TMT

395.05

-33.66

Cipla

167.35

-33.05

FDC

29.55

-30.55

B1

Nova Petrochemicals

14.15

-69.07

Shah Alloys

62.85

-63.44

Mawana Sugars

28.75

-61.28

Samtel Color

15.45

-61.08

Marksans Pharma

48.35

-57.96

B2

Tripex Overseas

18.45

-86.33

Pace Electroncis & Textiles

7.98

-79.85

Dhanalaxmi Roto Spinners

7.41

-75.82

Maharashtra Polybutenes

5.72

-63.22

Monnet Sugar

36.15

-61.09

Table: Turnover in Financial Markets and Commodity Market (Rs in Crores)

S No.

Market segments

2002-03

2003-04

2004-05 (E)

1

Government Securities Market

1,544,376

(63)

2,518,322

(91.2)

2,827,872

(91)

2

Forex Market

658,035

(27)

2,318,531

(84)

3,867,936

(124.4)

3

Total Stock Market Turnover (I+ II)

1,374,405

(56)

3,745,507

(136)

4,160,702

(133.8)

I

National Stock Exchange (a+b)

1,057,854

(43)

3,230,002

(117)

3,641,672

(117.1)

a)Cash

617,989

1,099,534

1,147,027

b)Derivatives

439,865

2,130,468

2,494,645

II

Bombay Stock Exchange (a+b)

316,551

(13)

515,505

(18.7)

519,030

(16.7)

a)Cash

314,073

503,053

499,503

b)Derivatives

2,478

12,452

19,527

4

Commodities Market

NA

130,215

(4.7)

500,000

(16.1)

Note: Fig. in bracket represents percentage to GDP at market prices

Source: SEBI bulletin

INDIAN STOCK MARKET AND COMMODITY MARKET – A COMPARISON

Sl. No.

Particulars

Stock Market

Commodity Market

1.

Regulatory Authority

Securities & Exchange Board of India (SEBI) Mittal Court ‘B’ Wing 224 Nariman Point Mumbai – 400 021

Forward Market Commission (FMC) Everest-3rd Floor 100 Marine Drive Mumbai – 400 002

2.

Ministry

Ministry of Finance, Govt. of India, Economic Affairs Deptt. Stock Exchange Division, New Delhi

Ministry of Consumer Affairs Food and Public Distribution, Deptt. of Consumer Affairs, New Delhi

3.

Act for Recognition/ Registration

SCR Act, 1956 & Rules 1957 and SEBI Act, 1992

Forward Contracts (Regulation) Act 1952 and Rules 1954

4.

No. of Recognized Exchanges

23

25

5.

Trading

Stock Bonds – Indices – Interest Currency – Units of M.F.I. Derivatives

Commodities and Precious Metals

6.

Derivative Instruments

Futures – Options-Interest Rates

Futures

7.

Purpose of Trading

Speculation – Arbitrage and Hedging of Risk

Transfer of Hedging Risk and Price Discovery

8.

Mode of Trading

Electronic – Computerized & Fully Automated

Computerized and Physical also

9.

Place of Trading

Recognized Stock Exchanges

Recognized Commodity Exchanges/Mandis

10.

Existence/ Availability of Demat facility

Yes of D.P. Service Both of NSDL and CDSL

Being worked out Through Ware Housing Receipts

11.

Status of Exchange

National Level & Regional

National Level Multi Commodity and Regional also

12.

Intermediaries

Stock Brokers, Sub Brokers Depositories, Mutual Funds, Transfer Agents, Credit Rating Agencies, FIIS, Investors and Others

Member Brokers, Commodity Mutual Funds, Clearing Houses, Collateral Managers, Commodity Brokers, Freight & Forward Agents, Mandi Operators, Warehouse Keepers and others

KEY FINDINGS

CONCLUSION

The concept of Commodity Trading is not new in India.Commodity Trading was very much existent in earlier times in India. In fact it was one the most vibrant forms of markets till the early 70s.

However due to numerous restrictions the Commodity Trading market could not develop further. Recently most of these restrictions have been removed, and therefore this allows for the development and growth of the commodity market in India.

The usefulness of Commodity Trading in futures is that it results in transparent and fair price discovery on account of large-scale participations of entities associated with different value chains. It also reflects views and expectations of a wider section of people who may be related to a particular commodity.

Commodity Trading in futures also provides an effective platform for price risk management to all the segments of players who participate in the Commodity Trading ranging from producers, traders and processors to exporters/importers and end-users of a commodity.

Commodity Trading also provides hedging, trading and arbitrage opportunities to market players. The Forward Markets Commission (FMC) is the regulatory body for Commodity Trading in futures/forward trade in India. The Forward Markets Commission is responsible for regulating and promoting futures trade in commodities.

The FMC has its headquarters in Mumbai and the regional office is located in Kolkata. There are some 21 commodity exchanges in India. But most of these commodity exchanges are regional, offline and commodity specific. The government has recently allowed four national level multi-commodity exchanges to trade in all permitted commodities.

Trade gurus are betting big bucks on the commodity trade and believe that it would be the next big thing for investors. Definitely, bigger than the stocks because globally the commodity trade is about three times the market of equities.

And in all this expectations of good times the Indian market can become the hotbed for global trading although Dalal Street giving Wall Street a run for the money, even in the near future, is still a dream. But judging by the way activity in the commodity market is picking up, it could soon rule the investor’s heart.

Here’s the current market scenario. The Indian commodity market is estimated to be around Rs 11,00,000 crore, which includes agricultural commodities (, tea, coffee, jute, rubber, spices, cotton, rice, wheat, soya, groundnut, etc), precious metals (gold and silver), base metals (aluminum, nickel, lead, iron ore, zinc, etc) and energy commodities (crude oil and coal).

The aim of a strong commodity market is based on the fact that commodities-related industries constitute about 58% of the country's GDP.

Presently, the various commodities traded across the exchanges have an annual turnover of Rs 2,90,000 crore, which also includes the high-volume crude oil trade listed recently on the MCX. With the introduction of futures trading and participation of more retail investors, this figure can multiply.

The commodity market in India is expected to grow at an annual rate of 40% over the next five years. The rewarding commodity futures volumes touch $800 mn a day on an average and it is expected to grow at 100% every year. With FIIs eying the Indian markets, commodities can also gain immeasurable depth.

With a minimum investment of as low as Rs 5,000 and more than 42 traded commodities on offer for the investor, commodity trading is a hot option. The trading has been further boosted by the emergence of a highly evolved national commodity markets on the lines of NSE.

Besides the three national exchanges -- National Commodity and Derivative Exchange (NCE), the Multi Commodity Exchange (MCE) and the National Multi Commodity Exchange (NMCE), there are 22 more exchanges and trading boards recognised by Forward Markets Commission (FMC).

With the WTO ushering in a new era in international trade, commodity trading becomes a global observable fact as price issues cannot be manipulated easily, hence futures and options can be used in trading.

India being a major user of the world’s most traded commodity crude oil, edible oil and gold can become the hub of such commodities.

Whether it is equity or commodities, one has to trade carefully in futures. These futures’s product can make or break your investments. As of now we have only futures available in commodities with out any hedges.

Suggestions:

If you want to be unadventurous then keep your buy orders at day's low level and Short orders at Day's high levels. This will substantially reduce your stop losses. But only problem, is your trade might or might not get executed and you have to wait for your turn next day.

REFERENCES

Research Papers

Print Email Download

Share This Essay

Did you find this essay useful? Share this essay with your friends and you could win £20 worth of Amazon vouchers. One winner chosen at random each month.

Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:

Request the removal of this essay.


More from UK Essays

Paid Writing Services

Free Content

About UK Essays

Order Now

Instant Price