Commodity play, for just Rs 5000

INVESTING

Trading in commodity futures may sound alien to general investors, but it is far from it.

Moreover, it's easier now. You have three national platforms "" the National Commodity and Derivative Exchange (NCDEX), the Multi Commodity Exchange of India Ltd (MCX) and the National Multi Commodity Exchange of India Ltd (NMCE).

All the three national bourses have electronic trading and settlement systems. These exchanges are permitted to allow trading in all commodities.

Besides the three, there are 24 other regional, small and single commodity exchanges that trade in various commodities.

Several already established equity brokers have sought membership with NCDEX and MCX. The likes of Refco Sify Securities, Motilal Oswal Commodities SSKI (Sharekhan) ISJ Comdesk (ISJ Securities) and Sunidhi Consultancy are already offering commodity futures. Some of them also offer trading through the internet just like the way they offer equities.

The money needed for trading in commodities is small "" as low as Rs 5,000. All you need is money for margins payable upfront to the exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract.

You can start trading with Rs 5,000 at ISJ Commtrade, but others have different packages for clients.

For trading in bullion "" gold and silver "" the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 6,500 for one trading unit of gold (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, quintal or tonne), but again the minimum sum required to begin will be approximately Rs 5,000.

The futures markets have delivery and cash settlement systems. 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 warehouse receipts. The option to settle in cash or through delivery can be changed as many times as you want till the last day of the expiry of the contract.

To begin trading in futures, 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. You will have to enter into normal account agreements with the broker.

These include the procedure of the know your client (KNY) 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.

But if you are farmer, you will not be asked for PAN no. But a reference from the APMC market where you sell or deliver your goods.

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 exchanges.

The exchanges are regulated by the Forward Markets Commission ( FMC). Unlike 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.

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 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.

There are certain clarifications one needs to seek as far as taxation is concerned. If the trade is squared off no sales tax is applicable. The tax is applicable only in case of a trade resulting in delivery.

Normally, it is the seller's responsibility to collect and pay sales tax. The tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have the tax registration number.

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.

Both 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.

If you are a farmer or a holder of physical stock, you need to be aware that 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. The margin is calculated by value at risk system. Normally it is between 5 per cent and 10 per cent of the contract value.

The margin is different for each commodity. 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.