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Commodities Trading FAQ
Where do I need to go to trade in commodity futures?
You have
three options - the National Commodity and Derivative Exchange, the Multi
Commodity Exchange of India Ltd and the National Multi Commodity Exchange of
India Ltd. All three have electronic trading and settlement systems and a
national presence.
What is the minimum investment needed?
You can
have an amount as low as Rs 5,000. All you need is money for margins payable
upfront to exchanges through brokers. The margins range from 5-10 per cent of
the value of the commodity contract. While you can start off trading at Rs 5,000
with ISJ Commtrade other brokers have different packages for clients.
For
trading in bullion, that is, gold and silver, the minimum amount required is Rs
650 and Rs 950 for on the current price of approximately Rs 65,00 for gold for
one trading unit (10 gm) and about Rs 9,500 for silver (one kg).
The
prices and trading lots in agricultural commodities vary from exchange to
exchange (in kg, quintals or tonnes), but again the minimum funds required to
begin will be approximately Rs 5,000.
Do I have to give delivery or settle in cash?
You can
do both. All the exchanges have both systems - cash and delivery mechanisms. The
choice is yours. If you want your contract to be cash settled, you have to
indicate at the time of placing the order that you don't intend to deliver the
item.
If you
plan to take or make delivery, you need to have the required warehouse receipts.
The option to settle in cash or through delivery can be changed as many times as
one wants till the last day of the expiry of the contract.
What do I need to start trading in commodity futures?
As of now
you will need only one bank account. You will need a separate commodity demat
account from the National Securities Depository Ltd to trade on the NCDEX just
like in stocks.
What are the other requirements at broker level?
You will
have to enter into a normal account agreements with the broker. These include
the procedure of the Know Your Client format that exist in equity trading and
terms of conditions of the exchanges and broker. Besides you will need to give
you details such as PAN no., bank account no, etc.
What are the brokerage and transaction charges?
The
brokerage charges range from 0.10-0.25 per cent of the contract value.
Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The
brokerage will be different for different commodities. It will also differ based
on trading transactions and delivery transactions. In case of a contract
resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract
value. The brokerage cannot exceed the maximum limit specified by the exchanges.
Where do I look for information on commodities?
Daily
financial newspapers carry spot prices and relevant news and articles on most
commodities. Besides, there are specialised magazines on agricultural
commodities and metals available for subscription. Brokers also provide research
and analysis support.
But the
information easiest to access is from websites. Though many websites are
subscription-based, a few also offer information for free. You can surf the web
and narrow down you search.
Who is the regulator?
The
exchanges are regulated by the Forward Markets Commission. Unlike the equity
markets, brokers don't need to register themselves with the regulator.
The FMC
deals with exchange administration and will seek to inspect the books of brokers
only if foul practices are suspected or if the exchanges themselves fail to take
action. In a sense, therefore, the commodity exchanges are more self-regulating
than stock exchanges. But this could change if retail participation in
commodities grows substantially.
Who are the players in commodity derivatives?
The
commodities market will have three broad categories of market participants apart
from brokers and the exchange administration - hedgers, speculators and
arbitrageurs. Brokers will intermediate, facilitating hedgers and speculators.
Hedgers
are essentially players with an underlying risk in a commodity - they may be
either producers or consumers who want to transfer the price-risk onto the
market.
Producer-hedgers are those who want to mitigate the risk of prices declining by
the time they actually produce their commodity for sale in the market; consumer
hedgers would want to do the opposite.
For
example, if you are a jewellery company with export orders at fixed prices, you
might want to buy gold futures to lock into current prices. Investors and
traders wanting to benefit or profit from price variations are essentially
speculators. They serve as counterparties to hedgers and accept the risk offered
by the hedgers in a bid to gain from favourable price changes.
In which commodities can I trade?
Though
the government has essentially made almost all commodities eligible for futures
trading, the nationwide exchanges have earmarked only a select few for starters.
While the NMCE has most major agricultural commodities and metals under its
fold, the NCDEX, has a large number of agriculture, metal and energy commodities.
MCX also offers manycommodities for
futures trading.
Do I have to pay sales tax on all trades? Is registration mandatory?
No. If
the trade is squared off no sales tax is applicable. The sales tax is applicable
only in case of trade resulting into delivery. Normally it is the seller's
responsibility to collect and pay sales tax.
The sales
tax is applicable at the place of delivery. Those who are willing to opt for
physical delivery need to have sales tax registration number.
What happens if there is any default?
Both the
exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges
have a penalty clause in case of any default by any member. There is also a
separate arbitration panel of exchanges.
Are any additional margin/brokerage/charges imposed in case I want to take
delivery of goods?
Yes. In
case of delivery, the margin during the delivery period increases to 20-25 per
cent of the contract value. The member/ broker will levy extra charges in case
of trades resulting in delivery.
Is stamp duty levied in commodity contracts? What are the stamp duty rates?
As of
now, there is no stamp duty applicable for commodity futures that have contract
notes generated in electronic form. However, in case of delivery, the stamp duty
will be applicable according to the prescribed laws of the state the investor
trades in. This is applicable in similar fashion as in stock market.
How much margin is applicable in the commodities market?
As in
stocks, in commodities also the margin is calculated by (value at risk) VaR
system. Normally it is between 5 per cent and 10 per cent of the contract value.
The
margin is different for each commodity. Just like in equities, in commodities
also there is a system of initial margin and mark-to-market margin. The margin
keeps changing depending on the change in price and volatility.
Are there circuit filters?
Yes the
exchanges have circuit filters in place. The filters vary from commodity to
commodity but the maximum individual commodity circuit filter is 6 per cent. The
price of any commodity that fluctuates either way beyond its limit will
immediately call for circuit breaker. |
