A STUDY ON COMMODITIES MARKET

1. LITERATURE REVIEW

INTRODUCTION TO DERIVATIVES:
A derivative instrument, broadly, is financial contract whose payoff structure is
determined by the value of an underlying commodity, security, interest rate, share price index,
exchange rate, and oil price alike. Thus, a derivative instrument derives its value from some
underlying variable. A derivative instrument by itself does not constitute ownership. It is,
instead, a promise to convey ownership. All derivatives are based on some “cash” products. The
underlying basis of a derivative instrument may be any product including
1. Commodities like grain, coffee beans, orange juice, etc.
2. Precious metals like gold and silver
3.Foreign exchange rate
4. Bonds of different types, including medium and long-term negotiable debt securities
issued by governments, companies, etc.
5. Short-term debt securities such as T-bills
Derivatives are specialized contracts which are employed for a variety of
purposes including reduction of funding costs by borrowers, enhancing the yield on assets, and
modifying the payment structure of assets to correspond to the investor’s market view. In the
organized derivatives market where derivative products are traded, future market plays a
defining role. Futures contracts are traded on exchanges, and they are standardized according to
the rules and regulations of the exchange. The exchange determines the exact quality and
quantity of the goods to be delivered per contract, when the Implied Volatility Structure and
contract terminates and the location of the delivery. This standardization facilitates secondary
market trading and enhances the liquidity of the market. The parties involved need not concern
themselves with the creditworthiness of other players because the exchange itself guarantees the
performance of all parties. The seller of a futures contract is said to be in the ‘short’ position and
the buyer is said to be in the ‘long’ position. The date at which the parties must complete the

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transaction is the settlement or delivery date. The price agreed to by two parties is known as the
futures price.

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INTRODUCTION TO COMMODITIES MARKET:

Unknown to us, the commodities that have always been a part of our day-to-
day existence are also one of the finest investment avenues available. The wheat in our bread, the
cotton in our clothes, our gold jewels, the fuel that runs our cars, etc; are all traded across the
world in major exchanges. Over the ages, commodities have been the basis for trade and
industry. They have spurred commerce, encouraged exploration and altered the histories of
nations. Today, they play a very important role in the world economy with billions of dollars of
these commodities traded each day on exchanges across the world.

Commodities today have become an attractive investment vehicle. In the current

investment scenario, it is increasingly getting difficult for individuals and institutions to create a
well-balanced investment portfolio. With uncertainty in interest ratio, it is tough for the investor
to beat the ever rising inflation. Averse to being over exposed to equity markets, the investors are
left with limited choices.

COMMODITY:

A commodity may be defined as an article, a product or material that is bought

and sold. It can be classified as every kind of movable property, except Actionable Claims,
Money & Securities.

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.

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In fact, the size of the commodities markets in India is also quite significant. Of
the country's GDP of Rs 13, 20,730 Crore (Rs 13,207.3 billion), commodities related (and
dependent) industries constitute about 58 per cent.

Currently, the various commodities across the country clock an annual turnover
of Rs 1, 40,000 Crore (Rs 1,400 billion). With the introduction of futures trading, the size of the
commodities market grows many folds here on.

COMMODITY MARKET:

Commodity market is an important constituent of the financial markets of any

country. It is the market where a wide range of products, viz., precious metals, base metals, crude
oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a
vibrant, active and liquid commodity market. This would help investors hedge their commodity
risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

EVOLUTION OF COMMODITIES MARKET:

Commodities future trading was evolved from need of assured continuous
supply of seasonal agricultural crops. The concept of organized trading in commodities evolved
in Chicago, in 1848. But one can trace its roots in Japan. In Japan merchants used to store Rice in
warehouses for future use. To raise cash warehouse holders sold receipts against the stored rice.
These were known as “rice tickets”. Eventually, these rice tickets become accepted as a kind of
commercial currency. Latter on rules came in to being, to standardize the trading in rice tickets.
In 19th century Chicago in United States had emerged as a major commercial hub. So that wheat
producers from Mid-west attracted here to sell their produce to dealers & distributors. Due to
lack of organized storage facilities, absence of uniform weighing & grading mechanisms
producers often confined to the mercy of dealers discretion. These situations lead to need of
establishing a common meeting place for farmers and dealers to transact in spot grain to deliver
wheat and receive cash in return.
Gradually sellers & buyers started making commitments to exchange the
produce for cash in future and thus contract for “futures trading” evolved. Whereby the producer

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would agree to sell his produce to the buyer at a future delivery date at an agreed upon price. In
this way producer was aware of what price he would fetch for his produce and dealer would
know about his cost involved, in advance. This kind of agreement proved beneficial to both of
them. As if dealer is not interested in taking delivery of the produce, he could sell his contract to
someone who needs the same. Similarly producer who not intended to deliver his produce to
dealer could pass on the same responsibility to someone else. The price of such contract would
dependent on the price movements in the wheat market. Latter on by making some modifications
these contracts transformed in to an instrument to protect involved parties against adverse factors
such as unexpected price movements and unfavorable climatic factors. This promoted traders
entry in futures market, which had no intentions to buy or sell wheat but would purely speculate
on price movements in market to earn profit.

Trading of wheat in futures became very profitable which encouraged the entry
of other commodities in futures market. This created a platform for establishment of a body to
regulate and supervise these contracts. That’s why Chicago Board of Trade (CBOT) was
established in 1848. In 1870 and 1880s the New York Coffee, Cotton and Produce Exchanges
were born. Agricultural commodities were mostly traded but as long as there are buyers and
sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got
together to bring chaotic condition in New York market to a system in terms of storage, pricing,
and transfer of agricultural products. In 1933, during the Great Depression, the Commodity
Exchange, Inc. was established in New York through the merger of four small exchanges – the
National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange,
and the New York Hide Exchange.

The largest commodity exchange in USA is Chicago Board of Trade, The

Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity
Exchange and New York Coffee, sugar and cocoa Exchange. Worldwide there are major futures
trading exchanges in over twenty countries including Canada, England, India, France, Singapore,
Japan, Australia and New Zealand.

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HISTORY OF COMMODITY MARKET IN INDIA:

The evolution of organized futures market in india commenced in 1875 with

the setting up of the Bombay cotton trade association ltd. Following widespread discontent
among leading cotton mill owners and merchants over the functioning of the Bombay cotton
trade association, a separate association, Bombay cotton trade exchange ltd., was constituted in
1983. Futures trading in oilseeds originated with the setting up of the Gujarati Vyapari Mandali
in 1990, which carried out future trading in ground nuts, castor seeds and cotton. The Calcutta
Hessian Exchange ltd., and the east india jute association ltd. were set up in 1919 and 1927
respectively for futures trade in raw jute. Futures markets in bullion began in Mumbai in 1920,
and later similar markets were established in Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and
Calcutta, in due course several other exchanges were established in the country, facilitating trade
in diverse commodities such as pepper, turmeric, potato, sugar and jaggery. The futures trade in
spices was first organise by the india pepper and spices trade association (IPSTA) in cochin in
1957.

However many feared that derivatives fuelled unnecessary speculation and

were detrimental to the healthy functioning of the market for the underlying commodities,
resulting in to banning of commodity options trading and cash settlement of commodities futures
after independence in 1952. The parliament passed the Forward Contracts (Regulation) Act,
1952, which regulated contracts in Commodities all over the India. The act prohibited options
trading in Goods along with cash settlement of forward trades, rendering a crushing blow to the
commodity derivatives market. Under the act only those associations/exchanges, which are
granted reorganization from the Government, are allowed to organize forward trading in
regulated commodities. The act envisages three tire regulations: (i) Exchange which organizes
forward trading in commodities can regulate trading on day-to-day basis; (ii) Forward Markets
Commission provides regulatory oversight under the powers delegated to it by the central
Government. (iii) The Central Government- Department of Consumer Affairs, Ministry of
Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority.

The commodities future market remained dismantled and remained dormant

for about four decades until the new millennium when the Government, in a complete change in
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a policy, started actively encouraging commodity market. After Liberalization and Globalization
in 1990, the Government set up a committee (1993) to examine the role of futures trading. The
Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17
commodity groups. It also recommended strengthening Forward Markets Commission, and
certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option
trading in goods and registration of brokers with Forward Markets Commission. The
Government accepted most of these recommendations and futures’ trading was permitted in all
recommended commodities. It is timely decision since internationally the commodity cycle is on
upswing and the next decade being touched as the decade of Commodities.

Commodity exchange in India plays an important role where the prices of any
commodity are not fixed, in an organized way. Earlier only the buyer of produce and its seller in
the market judged upon the prices. Others never had a say.

Today, commodity exchanges are purely speculative in nature. Before

discovering the price, they reach to the producers, end-users, and even the retail investors, at a
grassroots level. It brings a price transparency and risk management in the vital market. A big
difference between a typical auction, where a single auctioneer announces the bids and the
Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by
law, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s
lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to
make sure no one gets the purchase or sale before they do.

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Different types of commodities traded

Commodities can be broadly classified into the following:

Precious Metals: Gold, Silver, Platinum etc 

Other Metals: Nickel, Aluminum, Copper etc 

Agro-Based Commodities: Wheat, Corn, Cotton, Oils,
Oilseeds. 
Soft Commodities: Coffee, Cocoa, Sugar etc 
Energy: Crude Oil, Natural Gas, Gasoline etc

The commodities market exists in two distinct forms:

 over-the-counter (OTC) market

 exchange based market

Similar to equities, there exists the spot and the derivatives segments.
Spot markets are essentially OTC markets and participation is restricted to people who are
involved with that commodity, such as the farmer, processor, wholesaler, etc.

A majority of the derivatives trading takes place through the exchange-

based markets with standardized contracts, settlements, etc. The exchange-based markets are
essentially derivative markets and are similar to equity derivatives in their working, that is,
everything is standardized and a person can purchase a contract by paying only a percentage of
the contract value.

A person can also go short on these exchanges.  Moreover, even though

there is a provision for delivery, most contracts are squared-off before expiry and are settled in
cash. As a result, one can see an active

participation by people who are not associated with the commodity.

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STRUCTURE OF COMMODITY FUTURE MARKET IN INDIA:

Ministry of consumer affairs

FMC

Commodity exchange

National Regional exchanges

exchanges

MCX NCDEX NMCE NBOT Other regional

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MINISTRY OF CONSUMER AFFAIRS, FOOD AND PUBLIC

DISTRIBUTION:

The Department pertaining to consumer affairs is responsible for the formulation of policies for:

 Monitoring Prices
 Consumer Movement in the country
 Controlling of statutory bodies (Bureau of Indian Standards (BIS) and Weights and
Measures)

 Internal Trade
 Inter-State Trade- The Spirituous Preparations (Inter-State Trade and Commerce) Control
Act, 1955 (39 of 1955).
 Control of Futures Trading- the Forward Contracts (Regulations) Act, 1952 (74 of 1952)

The Department for food and public distribution is responsible for the formulation of policies
for:

 Ensuring food security for the country through timely and efficient procurement and
distribution of food grains.
 Building up and maintenance of food stocks, their storage, movement and delivery to the
distributing agencies and monitoring of production, stock and price levels of food grains.
 Incentivizing farmers through fair value of their produce by way of Minimum Support
Price mechanism, distribution of food grains to Below Poverty Line (BPL) families.
 Covering poor households at the risk of hunger under Antyodaya Anna Yojna (AAY).
 Establishing grain banks in food scarce areas and involvement of Panchayati Raj
Institutions in Public Distribution System (PDS).
 Concerns for the sugar sector such  as fixing of Fair and Remunerative Price (FRP) of
sugarcane payable by Sugar factories, development and  regulation of sugar industry
(including training in sugar technology), fixation of levy price of sugar and its supply for
PDS and regulation of supply of free sale sugar.

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 Export and import of food grains, sugar and edible oils.

FORWARD MARKET COMMISSION:

Forward Markets Commission is (FMC) headquartered at Mumbai. It is a

regulatory authority for commodity futures market in India. It is a statutory body setup under
Forward Contracts (Regulation) Act 1952.The Commission functioned under the administrative
control of the Ministry of Consumer Affairs, Food & Public Distribution, Department of
Consumer Affairs, Government of India till 5th September 2013. Thereafter the Commission has
been functioning under the Ministry of Finance, Department of Economic Affairs, Government
of India, and it regulated Rs 17 trillion worth of commodity trades in India. The Commission
allows commodity trading in 17 exchanges in India, of which 6 are national. The Act provides
that the Commission shall consist of not less than two but not exceeding four members appointed
by the Central Government, out of them one being nominated by the Central Government to be
the Chairman of the Commission.

MERGING OF FMC WITH SEBI:

In the Union Budget 2015-16, it was proposed that FMC will be merged with
the securities market regulator - Securities and Exchange Board of India (SEBI). Amendments to
the relevant Acts were carried out through Chapter VIII of the Finance Act of 2015. With the
passing of Finance Act 2015, a notification was issued to repeal the Forward Contracts
Regulation Act with effect from 29 September 2015. Finance Minister Arun Jaitley announced
its merger with Securities and Exchange Board of India (SEBI) in his Budget speech of 2015.
The merger was announced to help streamline regulations, curb speculations in commodities
market as well as facilitate participation of domestic and Foreign Institutional Investors (FII). As
a result FMC merged with SEBI on 28th September 2015.

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THE FUNCTIONS OF THE FORWARD MARKETS COMMISSION:

 To advise the Central Government in respect of the recognition or the withdrawal of

recognition from any association or in respect of any other matter arising out of the
administration of the Forward Contracts (Regulation) Act 1952.
 To keep forward markets under observation and to take such action in relation to them,
as it may consider necessary, in exercise of the powers assigned to it by or under the Act.
 To collect and whenever the Commission thinks it necessary, to publish information
regarding the trading conditions in respect of goods to which any of the provisions of the
act is made applicable, including information regarding supply, demand and prices, and
to submit to the Central Government, periodical reports on the working of forward
markets relating to such goods
 To make recommendations generally with a view to improving the organization and
working of forward markets
 To undertake the inspection of the accounts and other documents of any recognized
association or registered association or any member of such association whenever it
considers it necessary.

POWERS OF THE COMMISSION

Section 4A of the FC (R) Act, 1952 deals with the powers of the Commission,
which are as follows:
The Commission has all the powers of a civil court under the code of Civil Procedure 1908 (5 of
1908) while trying a suit in respect of the following matters:
 Summoning and enforcing the attendance of any person and examining him on
oath
 Requiring the discovery and production of any documents
 Receiving evidence on affidavits
 Requisitioning any public record or copy thereof from any office
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 Any other matter which may be prescribed.

The Commission, thus, is a statutory authority entrusted with regulatory functions
under the Act. The Commission consists of a Chairman and two members. It has its headquarters
at Mumbai and a Regional Office at Kolkata. Forward Markets Commission has 5 divisions to
carry out various tasks. These divisions were formed on 1st August 2005 in order to streamline
the work on a functional basis.
i. Markets, Trading and Development (Market Division)
ii. Market Intelligence, Monitoring & Surveillance (M & S Division)
iii. Awareness, Training and Intermediary Registration and IT (IR Division)
iv. Investigation, Vigilance and Legal Affairs Division (Legal Affairs Division)
v. Commission Secretariat including HR, Administration and Finance, Grievances
(Administration Division) Each Division is headed by a Director, assisted by Deputy Directors,
Assistant Directors, Economic Officers and Junior Research Assistants.

LIST OF COMMODITY EXCHANGES RECOGNISED BY FMC:

A. National Exchanges:
S. No Name of the Exchanges
1 Multi Commodity Exchange of India Ltd., (MCX)
2 National Commodity & Derivatives Exchange of India Ltd., (NCDEX)
3 National Multi Commodity Exchange of India Ltd., (NMCE)
4 Indian Commodity Exchange Ltd., (ICEX)
5 Ace Derivatives and Commodity Exchange Ltd., (ACE)
6 Universal Commodity Exchange Ltd., (UCX)
b. Commodity specific regional exchanges:
7 Bikaner Commodity Exchange Ltd., Bikaner
8 Bombay Commodity Exchange Ltd., Vashi, Bombay
9 Chamber of commerce, Hapur
10 Central India Commerce Exchange Ltd. Gwalior
11 Cotton Association of India, Mumbai

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12 East India Jute & Hussian Exchange Ltd. Kolkata

13 First Commodities Exchange of India Ltd., Kochi
14 Haryana Commodities Ltd.,Sirsa
15 India Pepper & Spices Trade Association Kochin (IPSTA)
16 Meerut Agro Commodity Exchange Co. ltd. Meerut
17 National Board of Trade (NBOT), Indore
18 Rajkot Commodity Exchange Ltd., Rajkot
19 Rajdhani Oils & Oilseed Exchange ltd., Delhi
20 Surendranagar Cotton oil & Oilseeds Association Ltd., Surendranagar
21 Spices & Oilseeds Exchange Ltd. Sangli
22 Vijay Beopar Chamber Ltd., Muzaffarnagar

Other regional commodity exchanges not recognized by FMC:

S. no Name of the exchanges
1 Bhatinda Om & Oil Exchange ltd., Bhantinda
2 East India cotton Association Ltd.,
3 Calcutta Kanpur Commodity Exchange Ltd., Kanpur
4 E-Sugar India Ltd., Mumbai
5 Coffee Futures Exchange India Ltd., Bangalore
6 E-Commodities Ltd., New Delhi

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MAJOR COMMODITY EXCHANGES IN INDIA:

Multy Commodity Exchange Of India Ltd(MCX):

Multi Commodity Exchange of India Ltd  (MCX) is an independent commodity

exchange based in India. It was established in 2003 and is based in Mumbai. It is India's largest
commodity derivatives exchange where the clearance and settlements of the exchange happens
and the turnover of the exchange for quarter ended December 2017 was 12.82 trillion rupees.
MCX offers options trading in gold and futures trading in non-ferrous metals, bullion, energy,
and a number of agricultural commodities (mentha oil, cardamom, crude palm oil, cotton and
others).

In 2016, MCX was seventh among the global commodity bourses in terms of
the number of futures contracts traded, the latest yearly data from Futures Industry Association
(FIA) showed. In 2017 MCX partnered with Thomson Reuters to develop India’s first co-
branded commodity index series, the iCOMDEX. iCOMDEX series consists of iCOMDEX
Composite, iCOMDEX Base Metals, iCOMDEX Bullion, iCOMDEX Gold, iCOMDEX Copper
and iCOMDEX Crude Oil. Recently, the exchange has set up a web-based application
“ComRIS” (Commodity Receipts Information System) in order to maintain electronic record of
commodities deposited at the Exchange accredited warehouses and ensure flow of real time
information from the warehouses.

In February 2012, MCX had come out with a public issue of 6,427,378 Equity
Shares of Rs. 10 face value in price band of Rs. 860 to Rs. 1032 per equity share to raise around
$134 million. It was the first ever IPO by an Indian exchange and made MCX India’s only
publicly listed exchange.

From September 28, 2015, MCX is being regulated by the Securities and

Exchange Board of India (SEBI). Earlier MCX was regulated by the Forward Markets
Commission (FMC), which got merged with the SEBI on September 28, 2015.

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Commodities traded include:

 Metal - Aluminium, Aluminium Mini, Copper, Copper Mini, Lead, Lead Mini, Nickel,
Nickel Mini, Zinc, Zinc Mini.
 Bullion - Gold, Gold Mini, Gold Guinea, Gold Petal, Gold Petal ( New Delhi), Gold Global,
Silver, Silver Mini, Silver Micro, Silver 1000.
 Agro Commodities - Cardamom, Cotton, Crude Palm Oil, Kapas, Mentha Oil, Castor seed,
RBD Palmolien , Black Pepper.
 Energy - Brent Crude Oil, Crude Oil, Crude Oil Mini, Natural Gas.

NATIONAL COMMODITY & DERIVATIVE EXCHANGE:

National Commodity  & Derivatives Exchange Limited (NCDEX) is a

professionally managed on-line multi commodity exchange. The shareholders of NCDEX
comprises of large national level institutions, large public sector bank and companies. 

Promoter share holders:

 ICICI Bank Limited (ICICI)*

 Life Insurance Corporation of India (LIC)
 National Bank for Agriculture and Rural Development (NABARD)
 National Stock Exchange of India Limited (NSE)
Other Share Holders:

Canara Bank, Punjab National Bank (PNB), CRISIL Limited, Indian Farmers
Fertilizer Cooperative Limited (IFFCO), Goldman Sachs, Intercontinental Exchange (ICE),

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Shree Renuka Sugars Limited, Jaypee Capital Services Limited and Build India Capital Advisors
LLP, Oman India Joint Investment Fund, IDFC Private Equity Fund III.

NCDEX is the only commodity exchange in the country promoted by national

level institutions. This unique parentage enables it to offer a bouquet of benefits, which are
currently in short supply in the commodity markets. The institutional promoters and shareholders
of NCDEX are prominent players in their respective fields and bring with them institutional
building experience, trust, nationwide reach, technology and risk management skills. 

NCDEX is a public limited company incorporated on April 23, 2003 under

the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9,
2003. It commenced its operations on December 15, 2003. Corporate Identity No. is
U51909MH2003PLC140116.

NCDEX is a nation-level, technology driven de-mutualised on-line

commodity exchange with an independent Board of Directors and professional management -
both not having any vested interest in commodity markets. It is committed to provide a world-
class commodity exchange platform for market participants to trade in a wide spectrum of
commodity derivatives driven by best global practices, professionalism and transparency. 

NCDEX is regulated by Securities and Exchange Board of India. NCDEX is

subjected to various laws of the land like the Securities Contracts (Regulation) Act, 1956,
Companies Act, Stamp Act, Contract Act and various other legislations.
NCDEX headquarters are located in Mumbai and offers facilities to its members from the
centre's located throughout India. 

As of March 31, 2017, the Exchange offered trading in 25 commodity

contracts, which includes 22 agricultural commodity contracts, 1 bullion commodity contracts
and 2 metal commodity contracts

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PARTICIPANTS IN COMMODITY MARKET:

Hedgers, Speculators and Arbitrageurs

An efficient market for commodity futures requires a large number of market

participants with diverse risk profiles. Ownership of the underlying commodity is not required
for trading in commodity futures. The market participants simply need to deposit sufficient
money with brokerage firms to cover the margin requirements. Market participants can be
broadly divided into hedgers, speculators and arbitrageurs.

Hedgers:

They are generally the commercial producers and consumers of the traded
commodities. They participate in the market to manage their spot market price risk. Commodity
prices are volatile and their participation in the futures market allows them to hedge or protect
themselves against the risk of losses from fluctuating prices. For e.g. a copper smelter will hedge
by selling copper futures, since it is exposed to the risk of falling copper prices.

Speculators:

They are traders who speculate on the direction of the futures prices with the
intention of making money. Thus, for the speculators, trading in commodity futures is an
investment option. Most Speculators do not prefer to make or accept deliveries of the actual
commodities; rather they liquidate their positions before the expiry date of the contract.

Arbitrageurs:

They are traders who buy and sell to make money on price differentials across
different markets. Arbitrage involves simultaneous sale and purchase of the same commodities in
different markets. Arbitrage keeps the prices in different markets in line with each other. Usually
such transactions are risk free.

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The market functions because of the differing risk profiles of the market
participants. The fluctuation in commodity prices represents both, a risk and a potential for
profit. The hedgers transfer this risk by foregoing the associated profit potential. The speculators
assume this risk in the hope of realizing profits by predicting price movements. The arbitrageurs
make the process of price discovery more efficient Once we understand what are the risks and
returns involved for respective Commodity Market Participants, we can start investing
indifferent commodity avenues. In the next chapter we will learn about why commodity futures
are good investment avenues along with it's advantages and different commodities traded in
commodities market.

HOW COMMODITY MARKET WORKS?

There are two kinds of trades in commodities. The first is the spot trade, in
which one pays cash and carries away the goods. The second is futures trade. The underpinning
for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware
house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good
from the warehouse. But someone trading in commodity futures need not necessarily posses such
a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on
his expectation of where the price will go. Futures have something called an expiry date, by
when the buyer or seller either closes (square off) his account or give/take delivery of the
commodity. The broker maintains an account of all dealing parties in which the daily profit or
loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite
contract so that the net outstanding is nil.

For commodity futures to work, the seller should be able to deposit the
commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be
able to take physical delivery at a location of his choice on presenting the warehouse receipt. But
at present in India very few warehouses provide delivery for specific commodities.

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Following diagram gives a fair idea about working of the Commodity market.

Today Commodity trading system is fully computerized. Traders need not visit a
commodity market to speculate. With online commodity trading they could sit in the confines of
their home or office and call the shots.

The commodity trading system consists of certain prescribed steps or stages as

follows:

I.TRADING: At this stage the following is the system implemented-

- Order receiving
- Execution
- Matching
- Reporting
- Surveillance

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- Price limits
- Position limits
II.CLEARING: This stage has following system in place-

- Matching
- Registration
- Clearing
- Clearing limits
- Notation
- Margining
- Price limits
- Position limits
- Clearing house.
III. SETTLEMENT: This stage has following system followed as follows-

- Marking to market
- Receipts and payments
- Reporting
- Delivery upon expiration or maturity.

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TRADING IN COMMODITIES IN CASH SEGMENT/CASH

COMMODITIES:
Cash commodities or “actuals” refer to the physical goods—e.g., wheat, corn,
soybeans, crude oil, gold, silver—that someone is buying/selling/trading as distinguished from
derivatives.

TRADING IN COMMODITIES IN INDIA IN DERIVATIVE SEGMENT:

HOW TO TRADE COMMODITY FUTURES IN INDIA:

With the setting up of nation-wide multi-commodity exchanges, a new avenue

has been thrown open for Indian investors. These exchanges have electronic trading and
settlement systems making it easy to trade in commodity futures. Trading on these exchanges
does not require the investor to possess physical stocks. In fact less than 1% of the total traded
volume involves the transfer of physical commodities. Trading in commodity futures comprises
of three simple steps.

 Step One: Choosing a Broker

 Step Two: Depositing the Margin
 Step Three: Access to Information and a Trading Plan
 Process Flow In Commodity Futures Trading
All the above steps are common when investing in any of the Commodity
Exchanges like MCX and NCDEX .

Step one: Choosing a broker

The broker you choose should be a member of the exchanges you wish to trade
in. Other than this, one should keep the following factors in mind while choosing a broker:
 Competitive edge provided by the broker.
 Broker's knowledge of commodity markets.
 Credibility of the broker.
 Experience of the broker.

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 Net-worth of the broker.

 Quality of broker's trading platforms.
The relationship between the broker and the client is long-term. Thus there
must be a strong rapport, and mutual trust between the client and the broker. Further, the client
must communicate clearly to the broker his needs and objectives for trading in commodities,
whether they are for the purpose of hedging, investment, etc. Further, your objectives for
entering the market provide you with a valuable parameter to judge whether a broker fits your
needs.
In order to keep your investment decisions and objectives in check, it is
important to choose the right certified Commodities Broker, it is important to learn about the
process of depositing margin for commodity trading and why it is necessary to deposit margin
with the broker.

Step two: Depositing the margin

To begin trading, the investor needs to deposit a margin with his broker.
Margin requirements are of two types, the initial margin and the maintenance margin. These
margin requirements vary across commodities and exchanges but typically, the initial margin
ranges from 5-10% of the contract value.
The maintenance margin is usually lower than the initial margin. The investor's
position is marked to market daily and any profit or loss is adjusted to his margin account. The
investor has the option to withdraw any extra funds from his margin account if his position
generates a gain. Also, if the account falls below the maintenance margin, a margin call is
generated from the broker and the investor needs to replenish his account to the initial level.

Step three: Access to information and a trading plan

As commodity futures are not long-term investments, their performance needs
to be monitored. The investor should have access to the prevailing prices on the exchanges as
well as market information that can help predict price movements. Brokers provide research and
analysis to their clients. Other information sources are financial dailies, specialized magazines on
commodities and the internet. Further, an investor requires a trading plan. Such a trading plan

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can be developed in consultation with the broker. In any case, the investor has to remember to
ride his profits and cut his losses by using stop loss orders.

REASONS FOR INVESTING IN COMMODITIES:

Commodity Futures as an Investment Avenue Commodity futures are globally
recognized to be a part of every successful and diversified investment portfolio. The fact that the
returns from most of the commodities in the last 53 years from 1951 to 2006 have been higher
than the global inflation rate, establishes that investments in commodity are an effective hedge
against inflation. Some of the reasons that make investing in commodity futures an attractive
preposition are described below:
Leverage:
Commodity Futures trading is done on margins. The investor only deposits a
fraction of the value of the futures contract with the broker to cover the exchange specified
margin requirements. This gives the investor greater leverage and thus the ability to generate
higher returns.
Liquidity:
Unlike investment vehicles like real estate, investments in commodity futures
offer high liquidity. It is equally easy to both buy and sell futures and an investor can easily
liquidate his position whenever required. There is also another advantage of being able to use the
profits from a trade elsewhere, without having to close the position.
Diversification:
Investments in commodity markets are an excellent means of portfolio
diversification. For example, gold prices have historically shown a low correlation with most
other asset prices (such as equities) and thus offer an excellent means for portfolio
diversification.
Inflation hedge:
As the commodity prices determine price levels and consequently
inflation, investing in commodity futures can act as a hedge against inflation.

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Physical gold
Physical Gold is a product by which retail and high net worth investors
can take investment positions in dematerialized physical gold using the futures market. In this
product, the investor can hold physical gold, in a safe deposit vault approved by the exchange,
which is reflected in the investor's demat account. The main features of this are:
 Liquidity
 Assurance of purity
 Transparency of rates
 Safety
These features have attracted a large number of clients to the product since
its introduction. Many brokers offer a full package of services associated with the Physical Gold
contract, including acting as commission agent to take care of sales tax / VAT related issues.

FUNDAMENTAL FACTORS AFFECTING THE COMMODITY MARKET

Commodity trading is trading in commodity derivatives that include a

range of commodities from Petals, Precious metals, Energy and Agricultural commodities.
 Risk & Return
 Trading, Clearing and Settlement
 Demand & supply
 Demand Curve
 Global and domestic economy
 Economic growth
 Inflation
 Geo-political concerns
 Extra-ordinary events
 Speculation

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Risk & Return:

High return is followed by high risk. Based on an investor’s appetite to
take risk and his expectation of return he can prepare his portfolio. Commodity trading is not like
trading shares at spot prices. It is futures trading process. The uncertainty and risk involved are
part and parcel of the commodity market. Though futures’ trading of commodity market is same
as the futures trading in equity market the only differences is that supply demand estimates in
commodity market may not be as tough.

Trading, Clearing& Settlement:

Trading is when two or more parties negotiate to exchange goods with cash
at a specific date and price. There may be two types of investors in the commodity market. One
are the delivery based investors and other the cash (non-delivery) based investors. Exchanges
clear the trade in sense that both the negotiating parties are capable of respecting the contract and
the settlement agency take care of the settlement of goods against cash. Except for these basic
fundamentals of trading there are various other fundamentals that drive the commodity markets.
These fundamentals may be different for different commodities based on its characteristics.
There are certain important fundamentals that apply to all commodities either directly or
indirectly.

Demand& Supply:
Demand and supply are basic factors that affect the movement of any
commodity prices. The law of demand and supply is same for equity as well as commodity
markets. However demand and supply of all commodities vary during different time periods
depending upon seasons, domestic and global conditions and various other major factors
influencing its characteristics.

Demand curve:
It is refined form of demand analysis. Demand curve in a laymen’s term is a
graphical representation of demand over a period of time. Price is represented on y-axis and
demand on the x-axis. The graph is a line graph representing demand at particular prices over a

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period of time. It gives a clear understanding of the demand situation over a period of time at
various price levels.

Global and Domestic Economy:

Economic scenario significantly affects the prices of a commodity. Demand
and supply of any commodity has a direct relationship with economic condition in the state.
Depending upon the nature of the commodity, global and domestic economic scenarios affect the
commodity prices. For e.g.; Steel prices highly depend on global economic factors as this is a
globally and massively used commodity. However as far as a commodity like Kapas (cotton
beans) is concerned global factors affect less when compared to domestic factors.

Economic growth:
Economic growth of the world as well as the domestic economy is an
important fundamental that will affect the demand and supply positions in a country. If the
country is growing at a fast rate the consumption level will also be at a higher rate. This will
increase the demand on one hand but supply may not increase at the same rate as it takes time to
set up new industries and increase production. This drives the commodity prices of all major
commodities.

Inflation:
Commodities are considered as hedge against inflation because unlike equity,
commodity prices move in direction of inflation. With increase in inflation the prices of major
commodities tend to increase and it is true the other way as well.

Geo-Political Concerns:
Political factors have a direct as well as indirect effect on commodity prices.
For example if we take the case of Potato when one year back it was barred from trading on the
exchanges. However at time political factors can have positive effects as well.

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Extra-Ordinary Events:

There may be certain extra-ordinary factors that do not occur very frequent.
Wars, natural calamities, depression etc. are such events that affect the commodity prices in a
dramatic way.

Speculation:
Speculators bring information into system at times fake or over hyped in-order
to trigger the price movement in a particular direction. Speculators are though a part of technical
analysis but it is important in the matter of fact that speculation may be of some fundamental
factors. However they are an important part of the market’s price discovery mechanism.

THE IMPORTANT ROLE THAT COMMODITY MARKET CAN PLAY IN

INDIA:

While commodity markets in general and commodity derivatives market in

particular have existed in India for over 100 years, the official exchange traded mechanism for
commodities began as late as 2003. There have been issues of liquidity and issues of multiple
regulatory jurisdictions but at least there is a platform for forming a view and trading on
commodities.
Some very important functions that commodity markets can perform in the Indian context-

Achieve food security through commodity markets:

We recently saw a report about grains worth over Rs.800 Crore that were
destroyed in Punjab due to bad warehousing. Currently, this is the risk that the farmer is forced
to take. These farmers can use the futures market more effectively by selling futures on their
grains and locking in a price. This will ensure that farmers are not susceptible to the fluctuations
in the prices. Currently, farmers are being hit by weak pulses prices due to oversupply in the

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Indian market. This can be overcome by selling futures on these pulses at a price that is
remunerative for the farmer. In many Western markets, farmers actively use the futures market to
hedge risk caused by the price fluctuation in case of agricultural products.
 
Greater investment in the agricultural ecosystem:

Today one of the big challenges for the agricultural sector is that there is
virtual absence of post-harvest infrastructure. As a result, a substantial amount of food grains are
lost in the transmission process which worsens the price situation for the end customer without
benefiting the farmer. A viable commodity market mechanism will be profitable for the farmer,
broker, middleman and the consumer and this will spur greater investments in the agricultural
ecosystem in the form of better warehousing systems and improvement transport facilities. Here
again a viable commodity market can play a key role in catalyzing the development of this
ecosystem.
 

A mechanism for aggregation and financing:

The big challenge in Indian agriculture is that farmers are too small and hence too
dispersed. The need of the hour is of an aggregator. Currently, the middlemen play the role of
aggregators but then it is not exactly a transparent mechanism. An organized commodity market
can play the role of an aggregator of agricultural products more efficiently and more effectively.
The market provides an organized and guaranteed mechanism for aggregating and selling
agricultural products and small and dispersed farmers can make the best of it. Financing is the
second aspect of commodity markets. The commodity markets have an organized and
institutional mechanism to raise financing against warehouse receipts.
Hence the agriculture sector does not have to depend unorganized financing.
 

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Retail investors can participate in a new asset class:

For long the investment classes for Indian investors had been limited to the
traditional gold, real estate, bonds, FDs and equities. While investors have indirectly participated
in commodities through the equity market mechanism, they still do not directly participate in
commodities as an asset class. The commodity exchange offers an opportunity to small and
medium sized investors to actively participate in a new asset class. In the process, they are also
able to diversify their concentration risk of the existing asset classes. There is also a wide choice
for investors and traders. They can participate in agricultural products or even in precious metals.
 

Absorbs some of the speculative excesses of the spot market:

This is a very important role that the commodity markets play. Let us take the
example of gold. A lot of the demand for gold is generated for speculative purposes. Since there
is only so much gold that India produces, we rely heavily on gold imports to meet the additional
demand. Now gold imports have a major downside. They result in utilization of precious foreign
exchange resources without any concomitant productivity benefits. This is more because traders
and speculators today prefer to hold on to spot gold. That problem can be resolved with a robust
gold futures market as it will absorb most of the speculative demand for gold.
In the process, it saves precious forex resources for the Indian economy.  

Hedging price and distribution of risk:

This is one of the most important functions of the commodity market in that it
helps distribute the risk and protects the originator of the risk. Take the case of a jewellery
manufacturer who wants to hedge against gold price volatility. The same can be done by selling
gold futures and locking in the price. Similarly, an FMCG food products company that wants to

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hedge against volatility in agricultural products can also use the futures market to hedge their
position. What the market does is that the overall risk tends to become granular and more
numbers of traders tend to share the risk.
 
Commodity markets in India are still at a nascent stage and have a long way to
go. Having said that they have an important role to play in discovering the price and hedging the
risk of commodities in India.

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2.1 INDUSTRY PROFILE

STOCK MARKET

Stock markets refer to a market place where investors can buy and sell stocks.
The price at which each buying and selling transaction takes is determined by the market forces
(i.e. Demand and supply for a particular stock).

A stock market is a public market for the trading of company stock and
derivatives at an agreed price; these are securities listed on a stock exchange as well as those
only traded privately.

The stock market is one of the most important sources for companies to raise
money. This allows businesses to be publicly traded, or raise additional capital for expansion by
selling shares of ownership of the company in a public market.

In fact, the stock market is often considered the primary indicator of a

country's economic strength and development. Rising share prices, for instance, tend to be
associated with increased business investment and vice versa.

In this way, investing in stock market, the stock exchanges also play
importance role. Exchanges also act as the clearinghouse for each transaction, meaning that they
collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates
the risk to an individual buyer or seller that the counterparty could default on the transaction. So,
here we also understand about stock exchanges as follows.

STOCK EXCHANGE:

A stock exchange is an entity which provides "trading" facilities for stock

brokers and traders, to trade stocks and other securities.

Stock exchanges are an organized marketplace, either corporation or mutual

organization, where members of the organization gather to trade company stocks or other
securities.

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Stock exchanges also provide facilities for the issue and redemption of
securities as well as other financial instruments and capital events including the payment of
income and dividends.

The securities traded on a stock exchange include: shares issued by companies,

unit trusts, derivatives, pooled investment products and bonds. To be able to trade a security on a
certain stock exchange, it has to be listed there. Usually there is a central location at least for
recordkeeping, but trade is less and less linked to such a physical place, as modern markets are
electronic networks, which gives them advantages of speed and cost of transactions. Trade on an
exchange is by members only. The initial offering of stocks and bonds to investors is by
definition done in the primary market and subsequent trading is done in the secondary market.

A stock exchange is often the most important component of a stock market.

Supply and demand in stock markets is driven by various factors which, as in all free markets,
affect the price of stocks.

There is usually no compulsion to issue stock via the stock exchange itself, nor
must stock be subsequently traded on the exchange. Such trading is said to be off exchange or
over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock
exchanges are part of a global market for securities.

LIST OF STOCK EXCHANGES IN INDIA:

As of now there are 23 SEBI approved stock exchanges in the country. Stock
market is managed and regulated by the Securities and Exchange Board of India (SEBI) Name of
all the approved stock exchange in India is given below:-

1. U.P. Stock Exchange, Kanpur

2. Vadodara Stock Exchange, Vadodara

3. Koyambtour Stock Exchange, Coimbatore

4. Meerut Stock Exchange, Meerut

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5. Mumbai Stock Exchange, Mumbai

6. Over the Counter Exchange of India, Mumbai

7. National Stock Exchange, Mumbai

8. Ahmedabad Stock Exchange, Ahmedabad

9. Bangalore Stock Exchange, Bangalore

10. Bhubaneshwar Stock Exchange, Bhubaneshwar

11. Calcutta Stock Exchange, Kolkata

12. Cochin Stock Exchange, Cochin

13. Delhi Stock Exchange, Delhi

14. Guwahati Stock Exchange, Guwahati

15. Hyderabad Stock Exchange, Hyderabad

16. Jaipur Stock Exchange, Jaipur

17. Canara Stock Exchange, Mangalore

18. Ludhiana Stock Exchange, Ludhiana

19. Chennai Stock Exchange, Chennai

20. M. P. Stock Exchange, Indore

21. Magadh Stock Exchange, Patna

22. Pune Stock Exchange, Pune

23. Capital Stock Exchange Kerala Ltd., Thiruvananthapuram, Kerala

On July 9, 2007 SEBI has withdrawn its approval from Saurashtra Stock
Exchange, Rajkot due to its passive working. Hence the number of approved stock exchanges
have come down to 23.
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MAJOR STOCK EXCHANGES IN INDIA:

BOMBAY STOCK EXCHANGE(BSE):

The Bombay stock exchange limited is the oldest stock exchange not only in
the country, but also in Asia with a rich heritage of over 143 years of existence. In the early days,
base was established as "the native share & stock brokers association."

It was established in the year 1875 and became the first stock exchange in the
country to be recognized by the government. In 1956, base obtained a permanent recognition
from the government of India under the securities contracts (regulation) act, 1956.

Today, BSE is the world's number 1 exchange in terms of the number of listed
companies and the world's 5th in handling of transactions through its electronic trading system.
The companies listed on base command a total market capitalization of USD trillion 2.175 as of
31, Oct, 2017.  BSE reaches to over 400 cities and town nation-wide and has around 5749 listed
companies, with over 8900 scripts being traded as on 31st Oct 2017

The BSE index, Sensex, is India’s first and most popular stock market
benchmark index. The BSE Sensex (sensitive index), also called the "BSE 30", is a widely used
market index in India and Asia. Sensex is tracked worldwide. It constitutes 30 stocks
representing 12 major sectors. The Sensex is constructed on a 'free-float' methodology, and is
sensitive to market movements and market realities. Apart from the Sensex, BSE offers 23
indices, including 13 sectoral indices. BSE provides an efficient and transparent market for
trading in equity, debt instruments and derivatives.

BSE is the first exchange in India and the second in the world to obtain an ISO
9001:2000 certifications. It is also the first exchange in the country and second in the world to
receive information security management system standard BSE 7799-2-2002 certification for its
BSE on-line trading system (bolt). BSE continues to innovate. In 2006, it became the first
national level stock exchange to launch its website in Guajarati and Hindi and now Marathi to
reach out to a larger number of investors.

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History of BSE:

The Bombay stock exchange is known as the oldest exchange in Asia. It

traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of
Mumbai’s town hall. The location of these meetings changed many times, as the number of
brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875
became an official organization known as 'the native share & stock brokers association'. In 1956,
the base became the first stock exchange to be recognized by the Indian government under the
securities contracts regulation act.

The Bombay stock exchange developed the BSE Sensex in 1986, giving
the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this
index to open its derivatives market, trading Sensex futures contracts. The development of
Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSE's
trading platform.

Historically an open-cry floor trading exchange, the Bombay stock

exchange switched to an electronic trading system in 1995. It took the exchange only fifty days
to make this transition.

The BSE On-Line Trading(Bolt):

BSE on-line trading (bolt) facilitates on-line screen based trading in

securities. Bolt is currently operating in 25,000 trader workstations located across over 359 cities
in India.

BSE Vision:

The vision of the Bombay stock exchange is

"To emerge as the premier Indian stock exchange by establishing global benchmarks."

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INDICES OF BSE:

 Sensex
 BSE 100(this covers banking sector)
 BSE 200(this covers capital goods)
 BSE 500(this covers consumer goods)
 BSE mid-cap index
 BSE small-cap index

BSE mid-cap index covers the FMCG sector and base small-cap index covers
the it, metal, oil & gas, power industry, psus, etc., BSE disseminates information on the price-
earnings ratio, the price to book value ratio and the dividend yield percentage on day-to-day
basis of all its major indices.

The values of all base indices are updated every 15 seconds during market
hours and displayed through the bolt system, base website and news wire agencies.

All base indices are reviewed periodically by the base index committee. This
committee which comprises eminent independent finance professionals frames the broad policy
guidelines for the development and maintenance of all base indices. The base index cell carries
out the day-to-day maintenance of all indices and conducts research on development of new
indices.

Awards achieved by BSE:

 Digital innovation award 2017 for the social media analytics project by net magic
 Business world digital leadership and cio award
 The IDC digital transformation awards 2017
 The best exchange of the year award for equity and currency derivatives in Tefla’s
commodity economic outlook award 2017
 Best brand award 2017 by economic times

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 CIO power list 2017

 Best corporate film encompassing vision, history, value and spirit of excellence award, best
corporate film on employer branding award and most influential hr leaders in India award at
world hard congress 2017
 'Best exchange of the year' award at 4th India bullion & jeweler awards 2017

NATIONAL STOCK EXCHANGE (NSE)

The national stock exchange of India limited (NSE), is a Mumbai-based stock

exchange. It is the largest stock exchange in India in terms of daily turnover and number of
trades, for both equities and derivative trading.

NSE has a market capitalization of around used trillion 2.194

(31october 2017). Though a number of other exchanges exist, NSE and the Bombay stock
exchange are the two most significant stock exchanges in India and between them are
responsible for the vast majority of share transactions.

NSE is mutually-owned by a set of leading financial institutions, banks,

insurance companies and other financial intermediaries in India but its ownership and
management operate as separate entities.

There are at least 2 foreign investors NYSE euro next and Goldman Sachs who
have taken a stake in the NSE. As of 2006, the NSE vast terminals, 2799 in total, cover more
than 1500 cities across India.

In October 2017, the equity market capitalization of the companies listed on

the NSE was us$ 1.94 trillion, making it the second largest stock exchange in south Asia.

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NSE is the third largest stock exchange in the world in terms of the number of
trades in equities. It is the second fastest growing stock exchange in the world with a recorded
growth of 16.6%.

History of NSE:

Capital market reforms in India and the launch of the securities and exchange
board of India (SEBI) accelerated the incorporation of the second INDIAN stock exchange
called the national stock exchange (NSE) in 1992. After a few years of operations, the NSE has
become the largest stock exchange in INDIA.

Three segments of the NSE trading platform were established one after another.
The wholesale debt market (WDM) commenced operations in June 1994 and the capital market
(cm) segment was opened at the end of 1994. Finally, the futures and options segment began
operating in 2000. Today the NSE takes the 14th position in the top 40 futures exchanges in the
world.

In 1996, the national stock exchange of India launched S&P CNX nifty and
CNX junior indices that make up 100 most liquid stocks in India. CNX nifty is a diversified
index of 50 stocks from 25 different economy sectors. The indices are owned and managed by
India index services and products ltd (IISL) that has a consulting and licensing agreement with
standard & poor's.

In 1998, the national stock exchange of India launched its web-site and was
the first exchange in India that started trading stock on the internet in 2000. The NSE has also
proved its leadership in the Indian financial market by gaining many awards such as 'best it usage
award' by computer society in India (in 1996 and 1997) and chip web award by chip magazine
(1999).

Markets:

Currently, NSE has the following major segments of the capital market:

 Equity

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 Futures and options

 Retail debt market
 Wholesale debt market
 Currency futures
 NSE became the first stock exchange to get approval for interest rate futures as
recommended by SEBI-RBI committee, on 31 august,2009, a futures contract based on
7% 10 year goo bond (notional) was launched with quarterly maturities.

Hours:

NSE normal trading sessions are conducted from 9:00 am India time to 3:30
pm India time on all days of the week except Saturdays, Sundays and official holidays declared
by the exchange (or by the government of India) in advance.

The exchange in association with base (Bombay stock exchange ltd.,) thinking
to revise its timings from 9.00 am India time till 5.00 pm India time. However, on Dec 17, 2009,
after strong protests from brokers, the exchange decided to postpone the change in trading hours
till Jan 04, 2010.

NSE new market timing from Jan 04, 2010 is 9:00 am till 3:30 pm India time.

NSE Group:

 National securities clearing corporation ltd. (NSCCL)

 National securities depository ltd. (NSDL)
 India index services & products ltd. (IISL)
 NSE.IT ltd.
 DotEx international limited

Indices of NSE:

NSE also set up as index services firm known as India index services &
products limited (IISL) and have launched several stock indices, including:

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 S&P CNX nifty (standard & poor's crisil NSE index)

 CNX nifty junior
 CNX 100 (= CNX nifty + CNX nifty junior)
 S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)
 CNX midcap (introduced on 18 July 2005 replacing CNX midcap 200)

Mission of NSE:

NSE mission is setting the agenda for change in the securities markets in India. The NSE was
set-up with the main objectives of:

 Establishing a nation-wide trading facility for equities, debt instruments and hybrids,
 Ensuring equal access to investors all over the country through an appropriate
communication network,
 Providing a fair, efficient and transparent securities market to investors using electronic
trading systems,
 Enabling shorter settlement cycles and book entry settlements systems, and
 Meeting the current international standards of securities markets.
 The standards set by NSE in terms of market practices and technology has become
industry benchmarks and is being emulated by other market participants. NSE is more
than a mere market facilitator. It's that force which is guiding the industry towards new
horizons and greater opportunities.

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2.2 COMPANY PROFILE

TRUSTLINE SECURITIES LTD

Trustline securities ltd. a Company registered under the Companies Act, 1956 is
a Member of the National Stock Exchange (NSE) & Bombay Stock Exchange (BSE) of Cash
and F&O Segment, Central Depository Services (I) Ltd. (CDSL), National Securities Depository
Ltd.(NSDL) and also a Trading and Clearing member of the Currency Derivative Segment of
NSE

Trustline is a professionally managed group headed by the directors, having vast

experience in the stock market. Besides the core promoters, the group is having its full fledged
teams headed by young and dynamic professionals like chartered accountants, company
secretaries, mbas, IT professionals etc. To handle the various divisions of the company.

We are fully equipped with all modern infrastructures to carry on its activities.
Our offices are well connected through the VPN, Lease line, ISDN, Internet and other network
facilities. All of its operations are computerized through the advanced technologies. All offices
are ultra modern ,hi-tech, well furnished and fully computerized, driven by the well-qualified
professionals.

We have a worldwide vision and it along with its associates is currently

providing state of the art stock broking services through all the major stock exchanges, trading
through NSE & BSE, depository services through CDSL & NSDL and all the services are
available under the one roof. With its ability to evolve with the changing environment the
Company has been able to put itself to the forefront of stock broking activities. With its network
spreading across various parts of India, it has made a distinct mark among the stock broking
houses and high net worth corporate as well as individuals.

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COMPANY ACHIEVEMENTS:

a. In 1995- Trustline Securities was registered as Private Limited Company.

b. 26thJuly, 1995- acquired membership of NSE (National Stock Exchange India
Limited).
c. 10th November, 1995 - acquired membership of DSE (Delhi Stock Exchange
Association Limited).
d. 23rdMay, 2000- became Trading member of F&O (Future & Option) segment of
NSE.
e. 16th May,2001- became Depository Participant of CDSL (Central Depository
Services India Limited)
f. . 21s t March 2003 - became Clearing member of F&O segment of NSE.
g. 30th September 2004- acquired membership of BSE (The Stock Exchange
Mumbai)

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MANAGEMENT PROFILE:

Dr. Mukesh Kansal

Fellow member of "The Institute of Chartered Accountants of
India" Fellow member of "The Institute of the Company
Secretaries of India" PhD. on "Stock Exchange and its
significance in India" with case study of DSEA Ltd. Having
more than 15 years of experience in Indian Stock Markets & Financial Services.

Mrs. Sarika Kansal

"Executive Director ”and one of the Principal promoter of M/s. Trustline Securities Pvt. Ltd.
Having more than 13 years of experience in Indian Stock Markets & Financial Services.

Mr. Vinay Kumar Gupta

Director and one of the Principal promoter of M/s. Trustline Securities Pvt. Ltd
Having more than 14 years of experience in Indian Stock Markets & Financial Services, being
the Director M/s. Trustline Securities Pvt. Ltd

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MISSION

To empower individual investors to take control of their financial lives, free

from the high cost sand conflicts of traditional stock broking firms.

VISION

To provide world class investment solutions to the class of investors who

believe in 'India as a story whose time has come and empower them through technology'. To
provide the most useful and ethical Investment Solutions - guided by values driven approach to
growth, client service and employee development Our Teams Knowledgeable experience
professionals having in-depth knowledge. Dedicated employees committed to customer services
Our Motto y To treat customers with dignity, respect and care. y Consistent efforts to improve
our skill and services to serve the customers better . K & A securities services Trustline
Securities Pvt. Ltd. offers the unique feature where our customers get to trade on NSE, BSE and
Derivatives all on one screen. Trustline also provides facility to put orders over the phone
through Relationship Managers. Walk-in Customer can always trade through our branch offices
located all across India.

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PRODUCTS & SERVICES

Equities:
Trust line provided the prospect of researched investing to its clients, which
was hitherto restricted only to the institutions. Research for the retail investor did not exist prior
to Trust line. Trust line leveraged technology to bring the convenience of trading to the
investor’s location of preference (residence or office) through computerized access. Trust line
made it possible for clients to view transaction costs and ledger updates in real time.

PMS:
The Portfolio Management Service is a product where in equity investment
portfolio is created to suit the investment objectives of a client. The company invests the
resources into stocks from different sectors, depending on your risk-return profile. This service is
particularly advisable for investors who cannot afford to give time or don't have that expertise for
day-to-day management of their equity portfolio.

Commodities:
Trust line extension into commodities trading reconciles its strategic intent to
emerge as a one-stop solutions financial intermediary. Its experience in securities broking has
empowered it with requisite skills and technologies. The Company’s commodities business
provides a contra-cyclical alternative to equities broking. The Company was among the first to
offer the facility of commodities trading in India’s young commodities market (the MCX
commenced operations only in 2003). Average monthly turnover on the commodity exchanges
increased from Rs 0.34 cr to Rs 20.02 cr. The commodities market has several products with
different and non-correlated cycles. On the whole, the business is fairly insulated against cyclical
gyrations in the business.

Mortgages:

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During the year under review, Trust line acquired a 75% stake in Money tree
Consultancy Services to mark its foray into the business of mortgages and other loan products
distribution. The business is still in the investing phase and at the time of the acquisition was
present only in the cities of Mumbai and Pune. The Company brings on board expertise in the
loans business coupled with existing relationships across a number of principals in the mortgage
and personal loans businesses. Trust line now has plans to roll the business out across its pan-
Indian network to provide it with a truly national scale in operations.

Invest in Online:
Trust line has made investing in Mutual funds and primary market so
effortless. All the investors have to do is register with the company and that’s all. No paperwork
no queues and No registration charges.

Invest In Mutual fund:

Trust line offers the investors a host of mutual fund choices under one roof,
backed by in-depth research and advice from research house and tools configured as investor
friendly.

IPO’s:
Investors could also invest in Initial Public Offers (IPO’s) online without
going through the hassles of filling any application form/ paperwork.

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RESEARCH METHODOLOGY

OBJECTIVES OF THE STUDY

 To study the concept of commodities market.

 To study the various trends in the commodity trading.

 To study the role of commodities market in Indian financial market.

 To analyze the present situation of the Indian commodities market.

 To understand the commodity price movements.

 To analyze various factors influencing the performance of the commodity market.

NEED OF THE STUDY

The study on commodities market in India is undertaken

 To analyze the trading practices with special reference to commodity as tool of risk
management techniques.
 To analyze commodity movements in the commodity market
 To get the clear & adequate knowledge on commodities market

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 A STUDY ON COMMODITIES MARKET

SCOPE OF THE STUDY

The study mainly focus on Indian commodity market, its history and latest
developments in the country. The study also helps to know about trading mechanism of
commodity market. The scope of the study is limited to Indian commodity market.

LIMITATIONS OF STUDY

 The sample size is limited to futures of Multi Commodity Exchange underlying scrip
only.
 The sample size is limited to the selected commodities only.
 The study is confined only to the commodities market in Indian context.
 The study of this analysis was mainly based on historical data & covers the period of 3
months only (Jan-march 2018).

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DATA COLLECTION METHODS

The data is collected through primary and secondary source.

 Primary data:
The data is collected through interaction with the staff, project guide and stock
brokers.
 Secondary data:
The data is collected through Journals, Internet & Text Books.

Sample Size:

The sample size consist of the commodities such as gold, silver, copper, crude oil & cotton.

Study Period:

The study include a period of 45 days

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4. DATA ANALYSIS& INTERPRETATION

GOLD (PER 10 GMS)

DATE OPEN PRICE HIGH PRICE LOW PRICE CLOSING PRICE

04-01-2018 29100 29227 29050 29207

11-01-2018 29285 29386 29261 29374

18-01-2018 29553 29660 29521 29608

25-01-2018 30270 30433 30125 30275

02-01-2018 30038 30498 29929 30446

08-02-2018 29950 30173 29805 30107

15-02-2018 30641 30681 30531 30579

22-02-2018 30459 30590 30400 30573

28-02-2018 30310 30446 30287 30379

08-03-2018 30477 30546 30396 30429

15-03-2018 30433 30473 30264 30299

22-03-2018 30530 30615 30465 30493

28-03-2018 30546 30550 30378 30408

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31000

30500

30000

29500
OPEN PRICE
HIGH PRICE
LOW PRICE
29000
CLOSING PRICE

28500

28000
18 18 18 18 18 18 18 18 18 18 18 18 18
20 20 20 20 20 20 20 20 20 20 20 20 20
1- 1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3-
-0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0
04 11 18 25 02 08 15 22 28 08 15 22 28

INTERPRETATION:

 I had taken three months information of gold futures from MCX and time period from jan-
2018 to mar 2018 on weekly basis.

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 In the above period the opening price is Rs. 29100 /- and closing price is Rs.30408 /- the
closing price of gold is more than the opening price.

 For gold the highest price of share value is Rs.30681 /- on Feb 15 and low price is

Rs.29050 /- on Jan 4 in these three months period.

SILVER (PER KG):

DATE OPEN PRICE HIGH LOW PRICE CLOSING

PRICE PRICE
04-01-2018 39420 39824 39400 39722

11-01-2018 39480 39495 39214 39361

18-01-2018 39511 39642 39370 39413

25-01-2018 40469 40677 40168 40461

02-01-2018 39916 40053 39769 39822

08-02-2018 38228 38630 38132 38514

15-02-2018 39220 39330 38740 39028

22-02-2018 38940 39271 38790 39240

28-02-2018 38668 38891 38626 38766

08-03-2018 39775 38888 38650 38759

15-03-2018 38852 38852 38450 38587

22-03-2018 38785 38933 38503 38577

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28-03-2018 38295 38369 38180 38322

41000

40500

40000

39500

39000

OPEN PRICE
38500
HIGH PRICE
LOW PRICE
38000 CLOSING PRICE

37500

37000

36500
18 18 18 18 18 18 18 18 18 18 18 18 18
20 20 20 20 20 20 20 20 20 20 20 20 20
1- 1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3-
-0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0
04 11 18 25 02 08 15 22 28 08 15 22 28

INTERPRETATION:

 I had taken three months information of silver from MCX and time period from
jan-2018 to mar 2018 on weekly basis.

 In the above period the opening price is Rs.39420 /- and closing price is
Rs.38322/- , the closing price of silver is less than the opening price.

 For silver the highest price of share value is Rs. 40677 /- on Jan 25 and low price
is Rs.38132 /-on Feb. 8 in these three months period.

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COPPER (PER KG):

DATE OPEN PRICE HIGH PRICE LOW PRICE CLOSING PRICE

04-01-2018 460.60 466.75 460.55 461.45

11-01-2018 462.50 463.30 456.50 460.25

18-01-2018 457.00 458.15 455.50 456.95

25-01-2018 460.35 461.05 454.80 455.45

02-01-2018 456.65 459.70 453.40 459.30

08-02-2018 446.70 447.45 440.50 445.05

15-02-2018 462.85 463.00 458.10 462.50

22-02-2018 460.60 469.40 458.15 468.85

28-02-2018 458.50 459.70 453.05 453.60

08-03-2018 452.00 452.35 444.20 445.30

15-03-2018 455.00 455.00 448.50 450.95

22-03-2018 444.55 446.15 435.65 438.95

28-03-2018 434.95 439.45 434.95 436.80

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480.00

470.00

460.00

450.00

OPEN PRICE
440.00 HIGH PRICE
LOW PRICE
CLOSING PRICE
430.00

420.00

410.00
18 18 18 18 18 18 18 18 18 18 18 18 18
20 20 20 20 20 20 20 20 20 20 20 20 20
1- 1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3-
-0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0
04 11 18 25 02 08 15 22 28 08 15 22 28

INTERPRETATION:

 I had taken three months information of copper from MCX and time period from jan-
2018 to mar 2018 on weekly basis.

 In the above period the opening price is Rs. 460.60 /-and closing price is Rs. 436.80 /- the
closing price of copper is less than the opening price.

 For copper the highest price of share value is Rs. 469.40 /- on feb-22 and low price is
Rs.434.95 /- on Mar 28 in these three months period.

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COTTON (PER BALE):

DATE OPEN PRICE HIGH PRICE LOW PRICE CLOSING PRICE

04-01-2018 20390 20490 20370 20460

11-01-2018 20490 21030 20490 20960

18-01-2018 20970 21270 20970 21030

25-01-2018 20620 20740 20540 20610

02-01-2018 20110 20370 20020 20300

08-02-2018 19940 20260 19880 20180

15-02-2018 19790 19830 19500 19560

22-02-2018 20070 20140 20010 20030

28-02-2018 20220 20600 20180 19750

08-03-2018 21230 21450 21200 21430

15-03-2018 21090 21130 20930 20970

22-03-2018 20810 20830 20700 20720

28-03-2018 20470 20500 20420 20430

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22000

21500

21000

20500

OPEN PRICE
20000 HIGH PRICE
LOW PRICE
19500 CLOSING PRICE

19000

18500
18 18 18 18 18 18 18 18 18 18 18 18 18
20 20 20 20 20 20 20 20 20 20 20 20 20
1- 1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3-
-0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0 -0
04 11 18 25 02 08 15 22 28 08 15 22 28

INTERPRETATION

 I had taken three months information of cotton from MCX and time period from jan-2018
to mar 2018 on weekly basis.

 In the above period the opening price is Rs.20390 /- and closing price is Rs.20340 /-the
closing price of cotton is less than the opening price.

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 For copper the highest price of share value is Rs.21450 /- on Mar 08 and low price is
Rs.19500 /-on Feb 15 in these three months period.

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CRUDE OIL (PER BARREL):

DATE OPEN HIGH LOW PRICE CLOSING

PRICE PRICE PRICE
04-01-2018 3947 3947 3915 3924

11-01-2018 4051 4099 4051 4074

18-01-2018 4108 4108 4075 4093

25-01-2018 4197 4215 4169 4192

02-01-2018 4128 4193 4128 4184

08-02-2018 3956 3967 3915 3949

15-02-2018 3921 3930 3830 3909

22-02-2018 3982 4104 3978 4085

28-02-2018 4096 4143 4042 4095

08-03-2018 3989 4002 3934 3952

15-03-2018 3975 4012 3960 3999

22-03-2018 4245 4259 4194 4201

28-03-2018 4194 4251 4218 4193

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4300

4200

4100

4000

OPEN PRICE
3900 HIGH PRICE
CLOSING PRICE
3800 LOW PRICE

3700

3600
18

18

18

18

18

18

18

18

18

18

18

18

18
0

0
0

0
-2

-2

-2

-2

-2

-2

-2

-2

-2

-2

-2

-2

-2
1

3
-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0

-0
04

18

08

08

15

28
11

25

02

15

22

28

22

INTERPRETATION:

 I had taken three months information of crude oil from MCX and time period from jan-
2018 to mar 2018 on weekly basis.

 In the above period the opening price is Rs. 3947/- and closing price is Rs.4193 /- the
closing price of crude oil is more than the opening price.

 For crude oil the highest price is Rs.4259 /- on march 22 and low price is Rs.3830 /- on
Feb 15 in these three months period.

5.1 FINDINGS

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 I find that the investors of the gold got some profits in the period of 3 months due to the
rises in the prices by the changes in US dollar& interest rate etc.,
 The investors of the silver & copper end with some losses in the period of three months
due to supply and demand factors.
 The investors who invest in cotton &crude oil in the month of January end with the
profits at the end of the march due to less supply.
 I came to know that there is no more fluctuations in the prices of the commodities in the
above period of 3 months.
 commodity options in gold were recently launched in india by MCX.
 I came to know that demand &supply factors influence the prices of the commodities
more and there are some other factors such economic growth, international markets& geo
political factors etc.,
 commodity market play an important role in discovering the price and hedging the risk
of commodities in India.
 Most of the people are interested invest in derivative market because there is no need pay
the entire value of the contract, only margin amount is required.

5.2 SUGGESTIONS

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 I suggest investors to take the advice of the consultants to invest in more profitable
commodity.
 Before investing an investor should have clear & adequate knowledge of the stock
market, so that they can earn maximum returns.
 The investor shouldn't enter in to the market in bullish period, they need to wait till the
bearish.
 I suggest investors to buy small quantities rather than the bulk quantities , because of high
price fluctuations.
 I suggest investors to observe trend of market, before going to invest.
 The SEBI and stock exchange have to take more actions to create awareness for the
investors.

6. CONCLUSION

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India is one of the top producer of large number of commodities and also has
a long history of trading in commodities and related derivatives. The market has made enormous
progress in terms of technology, transparency and trading activity.
Interestingly, this has happened only after the Government protection was removed from a
number of Commodities, and market force was allowed to play their role. As majority of Indian
investors are not aware of organized commodity market. their perception about is of risky to very
risky investment. Many of them have wrong impression about commodity market in their minds.
 It makes themspecious towards commodity market. Concerned authoritieshave to take initiative
to make commodity trading process easy and simple. Along with Government efforts NGO’s
should come forward to educate the people about commodity markets and to encourage them to
invest in to it. There is no doubt that in near future commodity market will become hot spot for
Indian investors.

BIBLIOGRAPHY

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TEXT BOOKS

COMMODITY AND DERIVATIVE MARKET

- Pawan jhabak

DERIVATIVES - VALUATION AND RISK MANAGEMENT

- David A. Dubofsky

JOURNALS:

International Journal of Business And Administration Research Review (IJBARR)

International Journal of Management And Social Sciences Research (IJMSSR)

WEBSITES:

Shodhganga.inflibnet.ac.in

files.spogel.com

www.bseindia.com

www.en.wikipedia.org

www.mcxindia.com

www.nseindia.com

www.trustline.in

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