Commodity trading for dummies

INVESTING

If you're new to the world of commodity trading, fear not, because using the platform in India is not beyond anyone's grasp or capability "" it's only a matter of making a beginning somewhere.

If you want to clarify some basic doubts but were afraid to ask, here's your chance to catch up on lost time. Below are some answers to some frequently popped questions.

The basic difference between the commodity exchange and stock exchange is that in a commodity exchange, actual physical products that are non-financial in nature are traded.

These include agricultural products such as wheat, castor, groundnut or sesame and industrial products such as aluminum, zinc, nickel and also precious metals like gold and silver.

In comparison, a stock exchange offers all financial products such as stocks, indexes, interest rate, and government securities.

Trading in any contract month will open on the 21st day of the month, 3 months prior to the contract month. For example, the December 2004 contract opens on 21st September 2004.

In commodities, the 20th day of the delivery month would be the due date. If the 20th happens to be a holiday then the due date would be the previous working day.

Typically, the margins for trading vary from commodity to commodity. For a more liquid commodity like gold or silver the initial margin and the exposure margin would be typically 4 per cent each. However, in other commodities the margins could vary depending on volatility of the commodity prices.

The pay-in (T+1) will be on or before 11.00 am, payout on or after 12.00 noon

All contracts settling in cash would be settled on the following day after the contract expiry date.

Deliveries are not compulsory. The buyer and the seller would have to express their intentions while to give or take delivery entering the contract. The exchange would match the deliveries at the client level. Contracts that are not assigned delivery are settled in cash.

In case of physical delivery, a receipt from the warehouse where the goods are stored is issued in favour of the buyer, which is transferable. On producing this receipt the buyer can take the commodity from the warehouse.

Where settlements go, for open positions at the beginning of the tendering period of the contract the buyer and the seller can give intentions for delivery.

Intentions for delivery could be given right until the final day on which that the contract expires. Delivery would take place in electronic form (in the national level exchanges). All other positions would be settled in cash.

Any buyer would have to put in a request to take physical delivery to its depository participant, who would pass on the same to the warehouse manager. On a specified date, the buyer would have to go to the warehouse and pick up the physical delivery.

The seller intending to make delivery would have to take the commodity to the designated warehouse. These commodities would have to be certified by an exchange-specified assayer.

The commodity that is meant for delivery would have to meet the contract specifications with a certain allowance for variances. If the commodity meets the specifications, the warehouse would accept it.

Warehouses would further ensure that the receipt is updated in the depository system, giving the due credit in the electronic account.

Also, every client who would want to give or take delivery would have to get registered as per the prevalent sales tax rates in his or her state.

Armed with the basic information, any trader should be ready to take the leap!