Investing in commodity trading

Bhupinder Kohli
If someone prudently advices you to invest in pepper, cotton, dry mango, metals or bullion in one breath, you may laugh it off. But with the multi-commodity market witnessing a boom, it deserves a sincere thought. Though the virtual multi-commodity market is larger than the physical one, it widely accepted as an option for price risk management. “By investing just five per cent of the deal, you can strike a contract,” says Gulmohar Singh, who invests in the commodity trading. You can generally book forward for a period of one month to four months, whenever the market is in your favour just get the best bargain. “It’s beneficial for all segments of players ranging from producers, traders and processors to exporters/importers and end-users of a commodity.”On the account of large-scale participations of entities associated with different value chains, future trading in commodities results in transparent and fair price discovery. “Most of the investors are interested in speculation with the shield of hedging. One marks a certain price beyond which he will not keep his share of commodity. Due to the price risk management, it’s a safer investment option than share market,” says V Kumar, a city based member of MCX, Sector 17. “In past two years the market has grown to national 7,000 crore per day. Internationally, the commodity trading enjoys 20,000 crore world over, that is four times than the stock market,“ he adds.. An informed investor is always at a gain. So, keeping a keep a watch at the market fluctuations and factors affecting them is always an added advantage. In Punjab and Haryana, besides, gold and silver, the investors are pretty interested in agro products. And even steel is in demand due to proximity to the physical market that exist in Mandi Gobindgarh. “With the monsoon showers arriving in the end of June, the big farmers have already booked their stock for coming four months here,” Kumar adds.Most of the investor would speculate, and buy or sell without physical transaction being made. However, there is always a provision for delivery in commodity futures trading to ensure that the future prices are in conformity with the underlying. The option for delivery is normally with the seller; the buyer/seller has to express his intention for delivery about five to seven days before the expiry.The Forward Market Commission (FMC) regulates commodity futures/forward trade in India. The commission was set up under the Forward Contracts (Regulation) Act of 1952. The FMC is headquartered in Mumbai while its regional office is located in Kolkata. Most of the physical markets exist in Mumbai and Delhi while certain specific markets do exist at other places also like at Hapur for mustard, rubber at Kochi and Kotium.The national level multi-commodity exchanges are: National Multi Commodity Exchange of India Ltd, Ahmedabad (NMCE)-- Indore (N-BOT)--www.nbotind.org.. National Commodity and Derivative Exchange, Mumbai (NCDEX)-- Multi Commodity Exchange of India Ltd, Mumbai (MCX)--www.mcxindia.com. Following commodities in various categories are expected to be available for trading through both the exchanges • Bullion: gold and silver Oil and oil seed: castor, soya, rape/mustard oil, crude palm oil, RBD palmolein • Grains and pulses: wheat and rice • Soft commodities: cotton, sugar, coffee • Spices and plantation: pepper and rubber Other commodities like aluminum, tea, groundnut, copra, gur (jagery)