Today, we know the commodity market as a place to trade the different commodities without taking delivery of same. You can trade in gold, silver, crude oil, agriculture products, metals and many more, without bothering about the perishable nature of commodity, place to store and security. When the commodity market was established, its purpose was to find a fair price and better market to agriculture products. In present era, the commodity market is mainly used by investors to earn the price differences in the commodities.
For example, you can buy 1 kg of silver costing around 60,000/- at commodity market and you don't have to deposit the whole some. You will deposit a certain amount only in case to cover the losses in future, for safety purpose of broker. Say you will deposit Rs. 5000/-. By depositing the sum now you can trade upto 50,000/- or 60,000/-, whatever broker allows you, depend upon your creditability. Now the second the price is up and it is 62,000/-. Now you can sale the same and earn a profit of Rs. 2000/- without investing the whole sum. That's how the market works in broader way. But always remember when there is profit, always there is a loss so be careful in investing in commodity market.
The way for commodity market comes to legal existence though establishment of Forward Market commission i.e. statutory body established in 1953. It is a regularity authority, which functions under the ministry of consumer affairs and public distribution. The central government grants recognition to exchanges on recommendation of FMC (Forward Market commission). The main object to establish a regulation body is to protect consumers and investors from any type of bulling and frauds in market.
The finance minister in his budget 2003-04, included the agriculture development as the "5 Priorities" so to create nationwide efficient commodity exchange forward market commission (FMC) gave approval to 4 entities to set up National Multi commodity exchanges, that are:-
The commodity markets are fully electronically traded and though open outcry system. Its working pattern is same as stock exchanges working in India. It works though a clearing house where settlements are take place. The main task of clearing house is to keep trace and record of every member's position in the market so that transactions can take place. When you enter a contract in commodity exchange the exchange will match it with the opposite contract entered by some other investor so that transaction can take place. For example, if you entered a contract to purchase 100 barrels of crude oil then market will match the same with contract of selling 100 barrels of cude oil. The price determination mechanism is worked based on the demand supply matching that leads to equilibrium price.
Investors should invest wisely in market. It is so volatile market. It is much different and risky as compare to share market. Reckless trading of any investor may lead him to extreme losses. You may hear many cases surrounding yourself of making huge losses in commodity exchange. Once you invest in the market must observe the market and should be vigilant, observe the movements and make instead decisions. If you are not fully aware of the market condition or you don't have time to continuously observe the market then better not to invest.
Always remember when there is profit, always there is a loss so be careful in investing in commodity market.
Thanks & Regards
CA Prashant Gupta