MBA Education & Careers
March 2006 20
What is Commodity Trading?
Any goods that are unbranded and are
commonly traded in the market, are called
commodities. Globally, the commodity
trade market is about three times the size of equities
trade market. In India, the commodities market is
still in a nascent stage and is going to be the next
big thing for investors. The expected growth rate
of commodity market is 40 per cent annually over
the next five years. The volume of business of the
24 commodity exchanges, including three national
exchanges, in the country during the year 2004-05
had touched a whopping Rs 5.71 lakh crore
(US$130 billion) while transactions during the first
six months of the current year has already touched
Rs 7.8 lakh crore.
The main difference between a commodity
exchange and stock exchange is as follows:
A commodity exchange deals in non-financial
commodities, be it agricultural commodities like
cotton, wheat, rice, groundnut, and non-agro
commodities like aluminum, zinc, and oil, whereas
a stock exchange deals in financial products like
stocks and government securities.
Commodity markets are quite like equity markets.
The commodity market also has two constituents
i.e. spot market and derivative market. In case of a
spot market, the commodities are bought and sold
for immediate delivery. In case of a commodities
derivative market, various financial instruments
involving commodities are traded on the
Commodity future is a derivative instrument for
the future delivery of a commodity on a fixed date
at a particular price. For e.g., if an investor
purchases a palm oil future, he is entering into a
contract to buy a fixed quantity of palm oil at a
future date. The future date is called the contract
expiry date. The fixed quantity is called the
contract size. Such a contract is called a Forward
Contract. These futures can be bought and sold
on the commodity exchanges.
Futures Contract is a type of forward contract.
Futures are exchange-traded contracts to sell or