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Stock Market Operations

Notes

Notes The goods those are unbranded and are commonly traded in the market come
under commodities.

13.1.1 Commodity Trading

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 having commodities as underlying are traded on the exchanges. It has
been seen that traditionally in India, people have hedged their risks with gold and silver.

13.1.2 The Indian Commodity Market

India, a commodity-based economy where two-thirds of the one billion populations depend on
agricultural commodities, surprisingly has an underdeveloped commodity market. Unlike the
physical market, futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock For instance, a jeweller can hedge his inventory against perceived short-term downturn in
gold prices by going short in the future markets.
Commodity Derivative markets started in India in Cotton in 1875 and in oilseeds in 1900 at
Bombay. Forward trading in raw jute and jute goods started at Calcutta in 1912. Forward Markets
in wheat had been functioning at Hapur in 1913 and in bullion at Bombay since 1920. In 1919, the
then Government of Bombay passed the Bombay Contract Control (War Provision) Act and set
up the Cotton Contracts Board. With a view to restricting speculative activity in cotton market,
the Government of Bombay issued an ordinance in September 1939 prohibiting option business.
The Bombay Options in Cotton Prohibition Act, 1939, later replaced the ordinance. In 1943, the
Defence of India Act was utilized on large scale for the purpose of prohibiting forward trading
in some commodities and regulating such trading in others on an all-India basis. In the same
year, oilseeds forward contracts prohibition order was issued and forward contracts in oilseeds
were banned. Similarly, orders were issued banning forward trading in food-grains, spices,
vegetable oils, sugar and cloth. These orders were retained with necessary modifications in the
Essential Supplies Temporary Powers Act 1946, after the Defence of India Act had lapsed. With
a view to evolving the unified systems, the Government of Bombay enacted the Bombay Forward
Contract Control Act 1947.
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 option.

In fact, the size of the commodities markets in India is also quite significant. Of the country’s
GDP of ` 13, 20,730 crore (` 13,207.3 billion), commodities-related (and dependent) industries
constitute about 58%. Currently, the various commodities across the country clock an annual
turnover of ` 1, 40,000 crore (` 1,400 billion). With the introduction of futures trading, the size of
the commodities market is likely to grow manifold from here on.

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