What is Commodity : A
short description.
A physical substance such as food,
grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through future contracts. The price of the commodity is subject to supply and demand. Risk is actually the
reason exchange trading of the basic agricultural products began.
How It Works:
More generally, a product which trades on a commodity exchange, this would also include foreign currencies and financial instruments and indexes. The world of commodities is complex,
fascinating, and has a profound effect on economies and consumers around the
world.
To be considered a commodity, an item must
satisfy three conditions:
-- It must be standardized (for agricultural and industrial
commodities it must be in a "raw" state).
-- It must be usable (i.e., have a shelf life) upon delivery.
-- Its price must vary enough to justify creating a market for the
item.
Trading of Commodity:
Buyers and sellers can
trade a commodity either in the spot market (sometimes called the
cash market), whereby the buyer and seller immediately complete their
transaction based on current prices, or in the futures market.
Most buyers and sellers
trade commodities on the futures markets because many commodity producers --
particularly those of traditional commodities like grain -- bear the
risk of potentially negative price changes when their products are finally
ready for the market. Futures contracts, whereby the buyer purchases the obligations to
receive a specific quantity of the commodity at a specific date and at a
specific price, therefore offer some price stability to commodity producers and
commodity users.
Regulation :
In the year 2003, the Indian Government
approved the establishment plan of four commodity exchanges of national level.
These national commodity exchanges would operate futures trading contracts for
multiple commodities. The Indian Government has included more commodities in
the list of permitted commodities, constructed under the Forward Contracts (Regulation)
Act.
Earlier there was a rule that every spot
market transaction has to be completed within 11 days. In order to promote
commodity trading, the Government of India has removed this restriction. Indian
Government has removed NTSD (Non-Transferable Specific Delivery Contract)
option from the Forward Contracts (Regulation) Act.
Commodities Exchanges in India:
There are three large major national
commodity exchanges in India, apart from this there are 18 domestic commodity
exchanges.
The 3
major national commodity exchanges are:
·
National Commodity and Derivatives Exchange
Limited.
·
Multi Commodity Exchange of India Ltd.
·
National Multi Commodity Exchange of India Ltd.
National
Commodity and Derivatives Exchange Limited – NCDEX . Essentially, NCDEX,
located in Mumbai, is a public limited company, which was incorporated on 23rd
April 23 2003. This was done under the Companies Act, 1956. On 9th May 2003, it
was given its Certificate for Commencement of Business, and it started its
business operations on 15th December 2003.
This
exchange is regulated by the Forward Market Commission with regards to the
futures trading in commodities. NCDEX is also subjected to certain laws of the
country that include:
·
Companies Act.
·
Stamp Act.
·
Contracts Act.
·
Forward Commission (Regulation) Act
Why It Matters:
Commodities are the
raw materials used by virtually everyone. The orange juice on your breakfast
table, the gas in your car, the meat on your dinner plate, and the cotton in
your shirt all probably interacted with a commodities exchange at one point.
Commodities exchange participants set or at least influence the prices of many
goods used by companies and individuals around the globe. Changes in commodity
prices can affect entire segments of an economy , and these changes can in
turn spur political action (in the form of subsidies, tax changes, or other
policy shifts) and social action (in the form of substitution, innovation, or
other supply-and-demand activity).
In general, however, the liquidity
and stability of the commodities exchanges helps producers, manufacturers,
other companies, and even entire economies operate more efficiently and more
competitively.