Page 134 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 7: Investment Strategies-II

How big is the Indian commodity trading market as compared to other Asian Notes
markets?

The commodity market in India clocks a daily average turnover of ` 12,000-15,000 crore (` 120-
150 billion). The accumulative commodities derivatives trade value is estimated to have reached
the equivalent of 66 per cent of the gross domestic product and the future will only see the
percentage rising, says ICICI direct.com vice-president Kedar Deshpande.

What do you need to start trading?

Like equity markets, you have to fulfil the ‘know your customer’ norms with a commodity
broker. A photo identification, PAN and proof of address are essential for registration. You will
also have to sign the necessary agreements with the broker.

Is there a regulator for the commodity trading market?

The Forward Markets Commission is the regulatory body for the commodity market in India.
It is the equivalent of the Securities and Exchange Board of India (Sebi), which protects the
interests of investors in securities.

What kind of products can be listed on the commodity market?

All commodities produced in the agriculture, mineral and fossil sectors have been sanctioned
for futures trading. These include cereals, pulses, ginned cotton, un-ginned cotton, oilseeds, oils,
jute, jute products, sugar, gur, potatoes, onions, coffee, tea, petrochemicals, and bullion, among
others.

What are the risk factors?

Commodity trading is done in the form of futures and that throws up a huge potential for profit
and loss as it involves predictions of the future and hence uncertainty and risk. Risk factors in
commodity trading are similar to futures trading in equity markets.
A major difference is that the information availability on supply and demand cycles in commodity
markets is not as robust and controlled as the equity market.

What are the factors that influence the commodity prices in the market?

The commodity market is driven by demand and supply factors and inventory, when it comes
to perishable commodities such as agricultural products and high demand products such as
crude oil. Like any market, the demand-supply equation influences the prices.
Variables like weather, social changes, government policies and global factors influence the
balance.

What is the difference between directional trading and day trading?

The key difference between commodity markets and stock markets is the nature of products
traded. Agricultural produce is unpredictable and seasonal. During harvesting season, the prices
of these commodities is low as supply goes up. There are traders who use these patterns to trade
in the commodity market, and this is termed directional trading. Day trading in commodity
markets is no different from day trading in the equity market, where positions are bought in the
morning and squared off by the end of the day.

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