Indian markets have recently thrown open a new
avenue for retail investors and traders to participate:
commodity derivatives. For those who want to diversify their
portfolios beyond shares, bonds and real estate, commodities is
the best option.
Till some months ago, this wouldn't have made sense. For
retail investors could have done very little to actually invest
in commodities such as gold and silver -- or oilseeds in the
futures market. This was nearly impossible in commodities except
for gold and silver as there was practically no retail avenue
for punting in commodities.
However, with the setting up of three multi-commodity
exchanges in the country, retail investors can now trade in
commodity futures without having physical stocks!
Commodities actually offer immense potential to become a
separate asset class for market-savvy investors, arbitrageurs
and speculators. Retail investors, who claim to understand the
equity markets may find commodities an unfathomable market. But
commodities are easy to understand as far as fundamentals of
demand and supply are concerned. Retail investors should
understand the risks and advantages of trading in commodities
futures before taking a leap. Historically, pricing in
commodities futures has been less volatile compared with equity
and bonds, thus providing an efficient portfolio diversification
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 grow many folds here on.
Like any other market, the one for commodity futures plays a
valuable role in information pooling and risk sharing. The
market mediates between buyers and sellers of commodities, and
facilitates decisions related to storage and consumption of
commodities. In the process, they make the underlying market
Here's how a retail investor can get started:
Where do I need to go to trade in commodity futures?
You have three options - the National Commodity and
Derivative Exchange, the Multi Commodity Exchange of India Ltd
and the National Multi Commodity Exchange of India Ltd. All
three have electronic trading and settlement systems and a
How do I choose my broker?
Several already-established equity brokers have sought
membership with NCDEX and MCX. The likes of Refco Sify
Securities, SSKI (Sharekhan) and ICICIcommtrade (ICICIdirect),
ISJ Comdesk (ISJ Securities) and Sunidhi Consultancy are already
offering commodity futures services. Some of them also offer
trading through Internet just like the way they offer equities.
You can also get a list of more members from the respective
exchanges and decide upon the broker you want to choose from.
What is the minimum investment needed?
You can have an amount as low as Rs 5,000. All you need is
money for margins payable upfront to exchanges through brokers.
The margins range from 5-10 per cent of the value of the
commodity contract. While you can start off trading at Rs 5,000
with ISJ Commtrade other brokers have different packages for
For trading in bullion, that is, gold and silver, the minimum
amount required is Rs 650 and Rs 950 for on the current price of
approximately Rs 65,00 for gold for one trading unit (10 gm) and
about Rs 9,500 for silver (one kg).
The prices and trading lots in agricultural commodities vary
from exchange to exchange (in kg, quintals or tonnes), but again
the minimum funds required to begin will be approximately Rs
Do I have to give delivery or settle in cash?
You can do both. All the exchanges have both systems - cash
and delivery mechanisms. The choice is yours. If you want your
contract to be cash settled, you have to indicate at the time of
placing the order that you don't intend to deliver the item.
If you plan to take or make delivery, you need to have the
required warehouse receipts. The option to settle in cash or
through delivery can be changed as many times as one wants till
the last day of the expiry of the contract.
What do I need to start trading in commodity futures?
As of now you will need only one bank account. You will need
a separate commodity demat account from the National Securities
Depository Ltd to trade on the NCDEX just like in stocks.
What are the other requirements at broker level?
You will have to enter into a normal account agreements with
the broker. These include the procedure of the Know Your Client
format that exist in equity trading and terms of conditions of
the exchanges and broker. Besides you will need to give you
details such as PAN no., bank account no, etc.
What are the brokerage and transaction charges?
The brokerage charges range from 0.10-0.25 per cent of the
contract value. Transaction charges range between Rs 6 and Rs 10
per lakh/per contract. The brokerage will be different for
different commodities. It will also differ based on trading
transactions and delivery transactions. In case of a contract
resulting in delivery, the brokerage can be 0.25 - 1 per cent of
the contract value. The brokerage cannot exceed the maximum
limit specified by the exchanges.
Where do I look for information on commodities?
Daily financial newspapers carry spot prices and relevant
news and articles on most commodities. Besides, there are
specialised magazines on agricultural commodities and metals
available for subscription. Brokers also provide research and
But the information easiest to access is from websites.
Though many websites are subscription-based, a few also offer
information for free. You can surf the web and narrow down you
Who is the regulator?
The exchanges are regulated by the Forward Markets
Commission. Unlike the equity markets, brokers don't need to
register themselves with the regulator.
The FMC deals with exchange administration and will seek to
inspect the books of brokers only if foul practices are
suspected or if the exchanges themselves fail to take action. In
a sense, therefore, the commodity exchanges are more
self-regulating than stock exchanges. But this could change if
retail participation in commodities grows substantially.
Who are the players in commodity derivatives?
The commodities market will have three broad categories of
market participants apart from brokers and the exchange
administration - hedgers, speculators and arbitrageurs. Brokers
will intermediate, facilitating hedgers and speculators.
Hedgers are essentially players with an underlying risk in a
commodity - they may be either producers or consumers who want
to transfer the price-risk onto the market.
Producer-hedgers are those who want to mitigate the risk of
prices declining by the time they actually produce their
commodity for sale in the market; consumer hedgers would want to
do the opposite.
For example, if you are a jewellery company with export
orders at fixed prices, you might want to buy gold futures to
lock into current prices. Investors and traders wanting to
benefit or profit from price variations are essentially
speculators. They serve as counterparties to hedgers and accept
the risk offered by the hedgers in a bid to gain from favourable
In which commodities can I trade?
Though the government has essentially made almost all
commodities eligible for futures trading, the nationwide
exchanges have earmarked only a select few for starters. While
the NMCE has most major agricultural commodities and metals
under its fold, the NCDEX, has a large number of
energy commodities. MCX also offers many
commodities for futures trading.
Do I have to pay sales tax on all trades? Is registration
No. If the trade is squared off no sales tax is applicable.
The sales tax is applicable only in case of trade resulting into
delivery. Normally it is the seller's responsibility to collect
and pay sales tax.
The sales tax is applicable at the place of delivery. Those
who are willing to opt for physical delivery need to have sales
tax registration number.
What happens if there is any default?
Both the exchanges, NCDEX and MCX, maintain settlement
guarantee funds. The exchanges have a penalty clause in case of
any default by any member. There is also a separate arbitration
panel of exchanges.
Are any additional margin/brokerage/charges imposed in
case I want to take delivery of goods?
Yes. In case of delivery, the margin during the delivery
period increases to 20-25 per cent of the contract value. The
member/ broker will levy extra charges in case of trades
resulting in delivery.
Is stamp duty levied in commodity contracts? What are the
stamp duty rates?
As of now, there is no stamp duty applicable for commodity
futures that have contract notes generated in electronic form.
However, in case of delivery, the stamp duty will be applicable
according to the prescribed laws of the state the investor
trades in. This is applicable in similar fashion as in stock
How much margin is applicable in the commodities market?
As in stocks, in commodities also the margin is calculated by
(value at risk) VaR system. Normally it is between 5 per cent
and 10 per cent of the contract value.
The margin is different for each commodity. Just like in
equities, in commodities also there is a system of initial
margin and mark-to-market margin. The margin keeps changing
depending on the change in price and volatility.
Are there circuit filters?
Yes the exchanges have circuit filters in place. The filters
vary from commodity to commodity but the maximum individual
commodity circuit filter is 6 per cent. The price of any
commodity that fluctuates either way beyond its limit will
immediately call for circuit breaker.