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How do I trade in Commodities

Q. What are the options available for trading in commodity futures?
A. In India, we have three major commodity exchanges - The National Commodity and Derivative Exchange (NCDEX), The Multi Commodity Exchange of India (MCX) and The National Multi Commodity Exchange of India (NMCE). All three have electronic trading and settlement systems and a national presence. There are multiple broker members associated with each or all of these commodities. You can choose any of these. You may find some tradiotional brokers, and also the new age brokers, which offer online trading in commodities just like equity markets.

Q. What the basic requirements to open a trading account in commodity futures?
A. The documentations are more or less the same like in equity markets. You need, a bank statement, address proof, PAN Card. The broker will help you with the (Know Your Client) KYC procedure.

Q. What are the brokerage charges, and other transaction costs involved?
A. The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/ per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges.

Q. How much capital do I need to start trading in commodities?
A. You can have an amount as low as Rs 5,000-10,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract.

The prices and trading lots, in the bullion market - gold and silver are calculated for ten grams for gold, and one kilo grams for silver. In case of agricultural commodities, the prices vary from exchange to exchange (in kg, quintals or tonnes).

As in stocks, in commodities also the margin is calculated by (value at risk) VaR system. Normally it is between 5 per cent and 10 per cent of the contract value.

Q. Do I have to give delivery or settle in cash?
A. You can do both. All the exchanges have both systems - cash and delivery mechanisms. The choice is yours. If you want your contract to be cash settled, you have to indicate at the time of placing the order that you don't intend to deliver the item.

If you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract.

Q. Do I have to pay sales tax on all trades? Is registration mandatory?
A. No. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller's responsibility to collect and pay sales tax.

Q. What happens if there is any default?
A. Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges.

Q. Who is the regulator?
A. The exchanges are regulated by the Forward Markets Commission. Unlike the equity markets, brokers don't need to register themselves with the regulator.

The FMC deals with exchange administration and will seek to inspect the books of brokers only if foul practices are suspected or if the exchanges themselves fail to take action. In a sense, therefore, the commodity exchanges are more self-regulating than stock exchanges. But this could change if retail participation in commodities grows substantially.


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