Ravi Pro. Sharekhan

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Advent Institute of Management

Science and Technology (ug)

Udaipur

A project report on a Brokerage company

Sharekhan Ltd.

Being submitted in partial fulfillment of the

BACHELOR OF MANAGEMENT STUDIES

(2008-2011)

Submitted to:- Submitted by:-

Ms. Priyanka mam Ravi Suthar

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INDEX

Chapter

No

Topic Page

No.

1 Introduction

2 Company profile

3 Mission and vision

4 Objective5 SWOT analysis

6 Competitors

7 Product and service

8 Introduction to

Commodity Market

9 History of Commodity

Market in India

10 Commodity exchanges in

India

11 NCDEX

12 MCX

NMCX

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Analysis

13 International Commodity

Exchanges

Quantitative Analysis

14 How Commodity market

works?

15 How to invest in a

Commodity Market?

16 Current Scenario in

Indian Commodity

Market

17 Limitations

18 Analysis

19 Annexure

20 Bibliography

INTRODUCTION

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FINANCIAL SYSTEM

The financial is one of the most important inventions of the modern society. The

phenomenon of imbalance in the distribution of capital or funds existed in every

economic system. There are areas or people with surplus funds and there are those with adeficit. A financial system functions as an intermediary and facilitates the flow of funds

from the areas of surplus to the areas of deficit. A financial system is a composition of

various institutions, markets, regulations and laws, practices, money managers, analysts,

transactions and claims and liabilities.

The functions performed by a financial system are:

THE SAVINGS FUNCTION:

LIQUIDITY FUNCTION:

PAYMENT FUNCTION:

RISK FUNCTION:

POLICY FUNCTION:

COMPANY PROFILE

SHAREKHAN LIMITED

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Sharekhan is one of the top retail brokerage houses in India with a strong online trading

platform. The company provides equity based products (research, equities, derivatives,

depository, margin funding, etc.). It has one of the largest networks in the country with

704 share shops in 280 cities and Indias premier online trading portal

www.sharekhan.com. With their research expertise, customer commitment and superior

technology, they provide investors with end-to-end solutions in investments. They

provide trade execution services through multiple channels - an Internet platform,

telephone and retail outlets.

Sharekhan was established by Morakhia family in 1999-2000 and Morakhia family,

continues to remain the largest shareholder. It is the retail broking arm of the Mumbai-

based SSKI [SHANTILAL SHEWANTILAL KANTILAL ISWARNATH LIMITED]

Group. SSKI which is established in 1930 is the parent company of Sharekhan ltd. With

a legacy of more than 80 years in the stock markets, the SSKI group ventured into

institutional broking and corporate finance over a decade ago. Presently SSKI is one of

the leading players in institutional broking and corporate finance activities. Sharekhan

offers its customers a wide range of equity related services including trade execution on

BSE, NSE, and Derivatives. Depository services, online trading, Investment advice,

Commodities, etc.

Sharekhan Ltd. is a brokerage firm which is established on 8th February 2000 and now it

is having all the rights of SSKI. The company was awarded the 2005 Most Preferred

Stock Broking Brand by Awwaz Consumer Vote. It is first brokerage Company to go

online. The Company's online trading and investment site - www.Sharekhan.com- was

also launched on Feb 8, 2000. This site gives access to superior content and transaction

facility to retail customers across the country. Known for its jargon-free, investor

friendly language and high quality research, the content-rich and research oriented portal

has stood out among its contemporaries because of its steadfast dedication to offering

customers best-of-breed technology and superior market information.

Share khan has one of the best states of art web portal providing fundamental and

statistical information across equity, mutual funds and IPOs. One can surf across 5,500

companies for in-depth information, details about more than 1,500 mutual fund schemes

and IPO data. One can also access other market related details such as board meetings,

result announcements, FII transactions, buying/selling by mutual funds and much more.

Sharekhan's management team is one of the strongest in the sector and has positioned

Sharekhan to take advantage of the growing consumer demand for financial services

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products in India through investments in research, pan-Indian branch network and an

outstanding technology platform. Further, Sharekhan's lineage and relationship with

SSKI Group provide it a unique position to understand and leverage the growth of the

financial services sector. We look forward to providing strategic counsel to Sharekhan's

management as they continue their expansion for the benefit of all shareholders."

SSKI Corporate Finance Private Limited (SSKI) is a leading India-based investment

bank with strong research-driven focus. Their team members are widely respected for

their commitment to transactions and their specialized knowledge in their areas of

strength. The team has completed over US$5 billion worth of deals in the last 5 years -

making it among the most significant players raising equity in the Indian market. SSKI, a

veteran equities solutions company has over 8 decades of experience in the Indian stock

markets.

If we experience their language, presentation style, content or for that matter the online

trading facility, we'll find a common thread; one that helps us make informed decisions

and simplifies investing in stocks. The common thread of empowerment is what

Sharekhan's all about!

"Sharekhan has always believed in collaborating with like-minded Corporate into

forming strategic associations for mutual benefit relationships" says Jaideep Arora,

Director - Sharekhan Limited.

Sharekhan is also about focus. Sharekhan does not claim expertise in too many

things. Sharekhan's expertise lies in stocks and that's what he talks about with

authority. So when he says that investing in stocks should not be confused with

trading in stocks or a portfolio-based strategy is better than betting on a single

horse, it is something that is spoken with years of focused learning and

experience in the stock markets. And these beliefs are reflected in everything

Sharekhan does for us! Sharekhan is a part of the SSKI group, an Indian

financial services power house, with strong presence in Retail equities

Institutional equities Investment banking.

Share khan Services:

Share khan is one of India's leading financial services company. It provides a complete

life cycle of investment solution in Equities, Derivatives, Commodities, IPO, Mutual

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Funds, Depository services, Portfolio Management Services and Insurance. Share khan

also offer personalized wealth management services for High Net worth individuals.

With a physical presence in over 300 cities of India through more than 800 "Share

Shops", and an online presence through Sharekhan.com, India's premier online

destination, it reaches out to more than 800,000 trading customers.

Mission & Vision

Mission:

To create long term value by empowering individual investors through superior

financial services supported by culture based on highest level of teamwork,

efficiency and integrity.

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Vision:

To provide the most useful and ethical Investment Solutions - guided by values

driven approach to growth, client service and employee development.

OBJECTIVES:

To project Sharekhan as an authority in the retail stock trading business.

To execute business for the company by selling demat accounts and mutual

funds.

To study the various products of the company.

To know how to open and close the calls.

To learn the online terminal used for trading.

To know the various policies of the company.

To know how to handle various types of customers.

To know various reasons for market fluctuations.

To learn to manage time.

To gain practical knowledge of the market.

To have a practical experience of working in a reputed organization.

SWOT ANALYSIS OF SHAREKHAN

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STRENGTHS WEAKNESSES

First brokerage firm to go online.

Products

PMS Services.

Technology

Online fund transfer.

Research reports.

Clients (average of 15,000 accounts per

year)

Recommendations from clients.

Free Demat a/c opening.

Low annual maintenance charge

High brokerage charges but now

they have overcome this by a new

prepaid scheme in which brokerageis reduced to half.

OPPORTUNITIES THREATS

Huge market. Volatility of the share market.

Competitors.

Competitors:

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Share khan is one of the major player in on line Trading. The

main competitors of Share khan are:

1. Religare Enterprises

2. India Info line

3. ICICI DIRECT

4. INDIA BULLS

5. RELIANCE MONEY

6. Kotak Securities

7. MOTILAL OSWAL

8. 5 Paisa

9. HDFC

10. Angel Trade

11. Standard Chartered

Product & services:-

Share khan customers have the advantage of trading in all the market segments

together in the same window, as we understand the need of transactions to be

executed with high speed and reduced time. At the same time, they have the

advantage of having all Advisory Services for Life Insurance, General

Insurance, Mutual Funds and IPOs also.

Sharekhan is a customer focused financial services organization providing a

range of investment solutions to our customers. We work with clients to meet

their overall investment objectives and achieve their financial goals. Our clientshave the opportunity to get personalized services depending on their investment

profiles. Our personalized approach enables clients to achieve their Total

Investment Objectives.

Key product offerings are as follows:-

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1.Equity

2. Commodity

3. Depository

4. Distribution

(a). IPO (b). Mutual Fund

(c). Insurance (d). Properties

5. Fixed Income

6. NRI Services

7. Back Office

8. Online services

Introduction to Commodity Market

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What is Commodity?

The word commodity came into use in English in the 15th century, it came from

the French, "commodit", to benefit or profit. Going further back, the French

word derived from the Latin commoditatem (nominative commoditas) meaning"fitness, adaptation,". The Latin root commod- meant variously "appropriate",

"proper measure, time or condition" and advantage, or benefit.

A commodity is something for which there is demand, but which is supplied

without qualitative differentiation across a market. It is a product that is the

same no matter who produces it, such as petroleum, notebook paper, or milk.[1]

In other words, copper is copper. The price of copper is universal, and fluctuates

daily based on global supply and demand. Sharekhan customers have the

advantage of trading in all the market segments together in the same window, as

we understand the need of transactions to be executed with high speed and

reduced time. At the same time, they have the advantage of having all Advisory

Services for Life Insurance, General Insurance, Mutual Funds and IPOs also.

Sharekhan is a customer focused financial services organization providing a

range of investment solutions to our customers. We work with clients to meet

their overall investment objectives and achieve their financial goals. Our clients

have the opportunity to get personalized services depending on their investment

profiles. Our personalized approach enables clients to achieve their Total

Investment Objectives.

Key product offerings are as follows

The word commodity came into use in English in the 15th century, it came

from the French, "commodities", to benefit or profit. Going further back, the

French word derived from the Latin commoditize

Stereos, on the other hand, have many levels of quality..

One of the characteristics of a commodity good is that its price is determined as

a function of its market as a whole. Well-established physical commodities have

actively traded spot and derivative markets. Generally, these are basic resources

and agricultural products such as iron ore, crude oil, coal, ethanol,salt, sugar,

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http://fr.wikipedia.org/wiki/commodit%C3%A9http://en.wikipedia.org/wiki/Commodity#cite_note-0%23cite_note-0http://en.wikipedia.org/wiki/Spot_markethttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Iron_orehttp://en.wikipedia.org/wiki/Coalhttp://en.wikipedia.org/wiki/Ethanolhttp://en.wikipedia.org/wiki/Salthttp://en.wikipedia.org/wiki/Sugarhttp://fr.wikipedia.org/wiki/commodit%C3%A9http://en.wikipedia.org/wiki/Commodity#cite_note-0%23cite_note-0http://en.wikipedia.org/wiki/Spot_markethttp://en.wikipedia.org/wiki/Agriculturehttp://en.wikipedia.org/wiki/Iron_orehttp://en.wikipedia.org/wiki/Coalhttp://en.wikipedia.org/wiki/Ethanolhttp://en.wikipedia.org/wiki/Salthttp://en.wikipedia.org/wiki/Sugar


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coffee beans,soybeans, aluminum, rice, wheat, gold and silver.

Commoditization occurs as a goods or services market loses differentiation

across its supply base, often by the diffusion of the intellectual capital necessary

to acquire or produce it efficiently. As such, goods that formerly carried

premium margins formarketparticipants have become commodities, such as

genericpharmaceuticals and silicon chips

COMMODITY MARKET:-

Commodity marketsare markets where raw or primary products are

exchanged. These raw commodities are traded on regulated commodities

exchanges, in which they are bought and sold in standardized contracts.

This article focuses on the history and current debates regarding global

commodity markets. It covers physical product (food, metals, electricity)

markets but not the ways that services, including those of governments, nor

investment, nor debt, can be seen as a commodity. Articles on reinsurancemarkets, stock markets,bond markets and currency markets cover those

concerns separately and in more depth. One focus of this article is the

relationship between simple commodity money and the more complex

instruments offered in the commodity markets.

History of Evolution of Commodity Markets:-

The modern commodity markets have their roots in the trading of agricultural

products. While wheat and corn, cattle and pigs, were widely traded using

standard instruments in the 19th century in the United States, other basic

foodstuffs such as soybeans were only added quite recently in most markets. For

a commodity market to be established, there must be very broad consensus on

the variations in the product that make it acceptable for one purpose or another.

The economic impact of the development of commodity markets is hard to

overestimate. Through the 19th century "the exchanges became effective

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http://en.wikipedia.org/wiki/Coffee_beanshttp://en.wikipedia.org/wiki/Soybeanshttp://en.wikipedia.org/wiki/Ricehttp://en.wikipedia.org/wiki/Wheathttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Silverhttp://en.wikipedia.org/wiki/Intellectual_capitalhttp://en.wikipedia.org/wiki/Marginhttp://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Participanthttp://en.wikipedia.org/wiki/Generic_brandhttp://en.wikipedia.org/wiki/Silicon_chiphttp://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Currency_markethttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Coffee_beanshttp://en.wikipedia.org/wiki/Soybeanshttp://en.wikipedia.org/wiki/Ricehttp://en.wikipedia.org/wiki/Wheathttp://en.wikipedia.org/wiki/Goldhttp://en.wikipedia.org/wiki/Silverhttp://en.wikipedia.org/wiki/Intellectual_capitalhttp://en.wikipedia.org/wiki/Marginhttp://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Participanthttp://en.wikipedia.org/wiki/Generic_brandhttp://en.wikipedia.org/wiki/Silicon_chiphttp://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodityhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Currency_markethttp://en.wikipedia.org/wiki/Commodity_money


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spokesmen for, and innovators of, improvements in transportation,

warehousing, and financing, which paved the way to expanded interstate and

international trade."

Early history of commodity markets

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 spotgrain 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 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

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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. Thats 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.

Size of the market

The trading of commodities consists of direct physical trading and derivatives

trading.The commodities markets have seen an upturn in the volume of trading

in recent years. In the five years up to 2007, the value of global physical exports

of commodities increased by 17% while the notional value outstanding of

commodity OTC derivatives increased more than 500% and commodity

derivative trading on exchanges more than 200%.The notional value

outstanding of banks OTC commodities derivatives contracts increased 27%

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in 2007 to $9.0 trillion. OTC trading accounts for the majority of trading in gold

and silver. Overall, precious metals accounted for 8% of OTC commodities

derivatives trading in 2007, down from their 55% share a decade earlier as

trading in energy derivatives rose.Global physical and derivative trading of

commodities on exchanges increased more than a third in 2007 to reach 1,684

million contracts. Agricultural contracts trading grew by 32% in 2007, energy

29% and industrial metals by 30%. Precious metals trading grew by 3%, with

higher volume in New York being partially offset by declining volume in

Tokyo. Over 40% of commodities trading on exchanges was conducted on US

exchanges and a quarter in China. Trading on exchanges in China and India has

gained in importance in recent years due to their emergence as significant

commodities consumers and producers.

Recent Trends in Commodities

The 2008 global boom in commodity prices - for everything from coal to corn

was fueled by heated demand from the likes of China and India, plus unbridled

speculation in forward markets. That bubble popped in the closing months of

2008 across the board. As a result, farmers are expected to face a sharp drop incrop prices, after years of record revenue. Other commodities, such as steel, are

also expected to tumble due to lower demand.

Returns

It is generally agreed that commodities have an expected return of 5% in real

terms which is based on the risk premium for 116 different commodities

weighted equally since 1888 (Source Report 219171-Wharton Business School).

Investment professionals often too mistakenly claim there is no risk premium in

commodites.

Spot trading

Spot trading is any transaction where delivery either takes place immediately, or

with a minimum lag between the trade and delivery due to technical constraints.Spot trading normally involves visual inspection of the commodity or a sample

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of the commodity, and is carried out in markets such as wholesale markets.

Commodity markets, on the other hand, require the existence of agreed

standards so that trades can be made without visual inspection.

Forward contracts

A forward contract is an agreement between two parties to exchange at some

fixed future date a given quantity of a commodity for a price defined today. The

fixed price today is known as the forward price.

Futures contracts:-

A Commodity futures is an agreement between two parties to buy or sell a

specified and standardized quantity of a commodity at a certain time in future at

a price agreed upon at the time of entering into the contract on the commodity

futures exchange.

The need for a futures market arises mainly due to the hedging function that it

can perform. Commodity markets, like any other financial instrument, involve

risk associated with frequent price volatility.

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Benefits of Commodity Futures Markets:-

The primary objectives of any futures exchange are authentic price discovery

and an efficient price risk management. The beneficiaries include those who

trade in the commodities being offered in the exchange as well as those who

have nothing to do with futures trading. It is because of price discovery and risk

management through the existence of futures exchanges that a lot of businesses

and services are able to function smoothly.

1. Price Discovery:-Based on inputs regarding specific market

information, the demand and supply equilibrium, weather forecasts, expert

views and comments, inflation rates, Government policies, market dynamics,

hopes and fears, buyers and sellers conduct trading at futures exchanges. This

transforms in to continuous price discovery mechanism. The execution of trade

between buyers and sellers leads to assessment of fair value of a particular

commodity that is immediately disseminated on the trading terminal.

2. Price Risk Management: -Hedging is the most common method

of price risk management. It is strategy of offering price risk that is inherent in

spot market by taking an equal but opposite position in the futures market.

Futures markets are used as a mode by hedgers to protect their business from

adverse price change. This could dent the profitability of their business.

Hedging benefits who are involved in trading of commodities like farmers,

processors, merchandisers, manufacturers, exporters, importers etc.

3. Import- Export competitiveness: - The exporters can hedge

their price risk and improve their competitiveness by making use of futures

market. A majority of traders which are involved in physical trade

internationally intend to buy forwards. The purchases made from the physical

market might expose them to the risk of price risk resulting to losses. The

existence of futures market would allow the exporters to hedge their proposed

purchase by temporarily substituting for actual purchase till the time is ripe to

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buy in physical market. In the absence of futures market it will be meticulous,

time consuming and costly physical transactions.

4. Predictable Pricing: -The demand for certain commodities ishighly price elastic. The manufacturers have to ensure that the prices should be

stable in order to protect their market share with the free entry of imports.

Futures contracts will enable predictability in domestic prices. The

manufacturers can, as a result, smooth out the influence of changes in their input

prices very easily. With no futures market, the manufacturer can be caught

between severe short-term price movements of oils and necessity to maintain

price stability, which could only be possible through sufficient financialreserves that could otherwise be utilized for making other profitable

investments.

5. Benefits for farmers/Agriculturalists:-Price instability has a

direct bearing on farmers in the absence of futures market. There would be no

need to have large reserves to cover against unfavorable price fluctuations. This

would reduce the risk premiums associated with the marketing or processing

margins enabling more returns on produce. Storing more and being more active

in the markets. The price information accessible to the farmers determines the

extent to which traders/processors increase price to them. Since one of the

objectives of futures exchange is to make available these prices as far as

possible, it is very likely to benefit the farmers. Also, due to the time lag

between planning and production, the market-determined price information

disseminated by futures exchanges would be crucial for their production

decisions.

6. Credit accessibility: -The absence of proper risk management

tools would attract the marketing and processing of commodities to high-risk

exposure making it risky business activity to fund. Even a small movement in

prices can eat up a huge proportion of capital owned by traders, at times making

it virtually impossible to payback the loan. There is a high degree of reluctance

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among banks to fund commodity traders, especially those who do not manage

price risks. If in case they do, the interest rate is likely to be high and terms and

conditions very stringent. This posses a huge obstacle in the smooth functioning

and competition of commodities market. Hedging, which is possible through

futures markets, would cut down the discount rate in commodity lending.

7. Improved product quality: -The existence of warehouses for

facilitating delivery with grading facilities along with other related benefits

provides a very strong reason to upgrade and enhance the quality of the

commodity to grade that is acceptable by the exchange. It ensures uniform

standardization of commodity trade, including the terms of quality standard: thequality certificates that are issued by the exchange-certified warehouses have

the potential to become the norm for physical trade.

History of Commodity Market in India

The history of organized commodity derivatives in India goes back to the

nineteenth century when Cotton Trade Association started futures trading in

1875, about a decade after they started in Chicago. Over the time datives market

developed in several commodities in India. Following Cotton, derivatives

trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta

(1912), Wheat in Hapur (1913) and Bullion in Bombay (1920).

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

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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 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 elses 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. Since 2002, the commodities future market in India has

experienced an unexpected boom in terms of modern exchanges, number of

commodities allowed for derivatives trading as well as the value of futures

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trading in commodities, which crossed $ 1 trillion mark in 2006. Since 1952 till

2002 commodity datives market was virtually non- existent, except some

negligible activities on OTC basis.

In India there are 25 recognized future exchanges, of which there are three

national level multi-commodity exchanges. After a gap of almost three decades,

Government of India has allowed forward transactions in commodities through

Online Commodity Exchanges, a modification of traditional business known as

Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of

commodities. The three exchanges are: National Commodity & Derivatives

Exchange Limited (NCDEX) Mumbai, Multi Commodity Exchange of India

Limited (MCX) Mumbai and National Multi-Commodity Exchange of India

Limited (NMCEIL) Ahmedabad. There are other regional commodity

exchanges situated in different parts of India.

Legal framework for regulating commodity futures in

India:-

The commodity futures traded in commodity exchanges are regulated by the

Government under the Forward Contracts Regulations Act, 1952 and the Rules

framed there under. The regulator for the commodities trading is the Forward

Markets Commission, situated at Mumbai, which comes under the Ministry of

Consumer Affairs Food and Public Distribution

Forward Markets Commission (FMC):-

It is statutory institution set up in 1953 under Forward Contracts (Regulation)

Act, 1952. Commission consists of minimum two and maximum four members

appointed by Central Govt. Out of these members there is one nominated

chairman. All the exchanges have been set up under overall control of Forward

Market Commission (FMC) of Governmentof India.

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Commodity exchanges in India

What is a commodity exchange?

A commodity exchange is an association or a company or any

other body corporate organizing futures trading in commodities

for which license has been granted by regulating authority.

List of Exchanges in India:-

1. Bhatinda Om & Oil Exchange Ltd., Batinda.

2. The Bombay Commodity Exchange Ltd., Mumbai

3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd

4. The Kanpur Commodity Exchange Ltd., Kanpur

5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut

6. The Spices and Oilseeds Exchange Ltd.

7. Ahmedabad Commodity Exchange

8. Vijay Beopar Chamber Ltd., Muzaffarnagar

9. India Pepper & Spice Trade Association, Kochi

10. Rajdhani Oils and Oilseeds Exchange Ltd., Delhi

11. National Board of Trade, Indore

12. The Chamber Of Commerce, Hapur

13. The East India Cotton Association, Mumbai

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14. The Central India Commercial Exchange Ltd., Gwalior

15. The East India Jute & Hessian Exchange Ltd.

16. First Commodity Exchange of India Ltd, Kochi

17. Bikaner Commodity Exchange Ltd., Bikaner

18. The Coffee Futures Exchange India Ltd, Bangalore

19. Esugarindia Limited

20. National Multi Commodity Exchange of India Limited

21. Surendranagar Cotton oil & Oilseeds Association Ltd

22. Multi Commodity Exchange of India Ltd

23. National Commodity & Derivatives Exchange Ltd

24. Haryana Commodities Ltd., Hissar

25. e-Commodities Ltd

Of these 25 commodities exchanges the MCX, NCDEX and

NMCEIL are the major Commodity Exchanges.

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NCDEX

(National Commodities & Derivatives Exchange Limited)

National Commodities & Derivatives Exchange Limited (NCDEX) promotedby ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India

(LIC), National Bank of Agriculture and Rural Development (NABARD) and

National Stock Exchange of India Limited (NSC). Punjab National Bank

(PNB), Credit Ratting Information Service of India Limited (CRISIL), Indian

Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman

Sachs by subscribing to the equity shares have joined the promoters as a share

holder of exchange. NCDEX is the only Commodity Exchange in the country

promoted by national level institutions.

NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is

a national level technology driven on line Commodity Exchange with an

independent Board of Directors and professionals 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 Forward Markets Commission (FMC). NCDEX is also

subjected to the various laws of land like the Companies Act, Stamp Act,

Contracts Act, Forward Contracts Regulation Act and various other legislations.

NCDEX is located in Mumbai and offers facilities to its members in more than

550 centers through out India. NCDEX currently facilitates trading of 57

commodities.

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Commodities Traded:-

Commodities Traded at NCDEX:-

Bullion:-

Gold KG, Silver, Brent

Minerals:-

Electrolytic Copper Cathode, Aluminum Ingot, Nickel

Cathode, Zinc Metal Ingot, Mild steel Ingots

Oil and Oil seeds:-

Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell),

Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein

seed oil cake, Refined soya oil, Rape seeds, Mustard seeds,

Caster seed, Yellow Electrolytic Copper Cathode, Aluminum Ingot,

Cathode, Zinc Metal Ingot, Mild steel Ingots

Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell),

Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein

seed oil cake, Refined soya oil, Rape seeds, Mustard seeds,

Caster seed, Yellow ,soybean, Meal

Pulses:-

Urad, Yellow peas, Chana, Tur, Masoor,

Grain:-

\Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR-

36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow

red maize

Spices:-

Jeera, Turmeric, Pepper

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Plantation:-

Cashew, Coffee Arabica, Coffee Robusta

Fibers and other:-

Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28

mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium

Staple, Mulberry, Green Cottons, , , Potato, Raw Jute,

Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334

Energy:-

Crude Oil, Furnace oil

(NCDEX currently facilitates trading of 57 commodities)

Agro-based major commodities:

Chilli:-

Chili is sold worldwide fresh, dried and powdered. In the United States, it is

often made from the Mexican chile ancho variety, but with small amounts of

cayenne added for heat. In the Southwest United States, dried ground chili

peppers, cumin, garlic and oregano is often known as chili powder. Chipotles

are dry, smoked red (ripe) jalapeos.

Indian cooking has multiple uses for chilis, from simple snacks likebhaji where

the chilis are dipped in batter and fried, to wonderfully complex curries. Chilis

are dried, roasted and salted as a side dish for rice varieties such as

dadhyodanam ("dadhi" curd, "odanam" rice in Sanskrit) or Thayir sadam (curd

rice) or Daal Rice (rice with lentils). The soaked and dried chillies are a

seasoning ingredient in recipes such as kootu. It is called "mirapa" ()in

telugu.

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Chana:-

There are two main kinds of chana:-

Desi, which has small, darker seeds and a rough coat, cultivated mostly in the

Indian subcontinent, Ethiopia, Mexico, and Iran.

Kabuli, which has lighter coloured, larger seeds and a smoother coat, mainly

grown in Southern Europe, Northern Africa, Afghanistan, and Chile, also

introduced during the 18th century to the Indian subcontinent.[6]

Groundnut (in shell):-

The peanut, orgroundnut (Arachis hypogaea), is a species in the legume

family (Fabaceae) native to South America, Mexico and Central America. [1] It

is an annual herbaceousplant growing to 30 to 50 cm (1 to 1.5 ft) tall. The

leaves are opposite,pinnate with four leaflets (two opposite pairs; no terminal

leaflet), each leaflet 1 to 7 cm ( to 2 in) long and 1 to 3 cm ( to 1 inch)

broad. The flowers are a typical peaflower in shape, 2 to 4 cm ( to 1 in)

across, yellow with reddish veining. Afterpollination, the fruit develops into a

legume 3 to 7 cm (1 to 2 in) long, containing 1 to 4 seeds, which forces its way

underground to mature.

Jeera:-

Cuminseed (Jeera) is a native of the Levant and Upper Egypt. Now it is grown

mainly in hot countries, especially India, North Africa, China and the Americas.

Cumin is stomachic, diuretic, carminative, stimulant, astringent, emmenagogic

and antispasmodic. It is valuable in dyspepsia, diarrhoea and hoarseness, and

may relieve flatulence and colic. It is a widely used spice in India.

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Indian 28 mm Cotton:-

Cotton is a soft, staple fiber that grows in a form known as a boll around the

seeds of the cotton plant, a shrub native to tropical and subtropical regions

around the world, including the Americas, India and Africa. The fiber most

often is spun into yarn or thread and used to make a soft, breathable textile,

which is the most widely used natural-fiber cloth in clothing today.

Facilities offered:-

NCDEX also offers as an information product, an agricultural commodity

index. This is a composite index, called NCDEXAGRI that convers 20

commodities currently being offered for trading by NCDEX. This is a spot-price

based index. NCDEX also offers as an information product, the index futures,

called FUTEXAGRI. This is essentially a what-if index. It indicates, that if

futures on the index could be traded, then the current FUTEXAGRI value

should be the no-arbitrage value for the index futures. However, indexes and

index futures are not allowed to be traded under the current regulatory structure.

Hence, these are only available for information, as of now.

MCX

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(Multi Commodity Exchange)

Multi Commodity Exchange (MCX) is an independent commodity exchange

based in India. It was established in 2003 and is based in Mumbai. The turnover

of the exchange for the period Apr-Dec 2008 was INR 32 Trillion [1]. MCX

offers futures trading in Agricultural Commodities, Bullion, Ferrous & Non-

ferrous metals, Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other

soft commodities.

MCX has also setup in joint venture theNational Spot Exchange a purely

agricultural commodity exchange and National Bulk Handling Corporation

(NBHC) which provides bulk storage and handling of agricultural products.

It is now regulated by forward market commission.

MCX is India's No. 1 commodity exchange with 84% Market share in

2008($0.84 trillion)[2]

The exchange's competitor is National Commodity & Derivatives Exchange

Ltd ([1])

Globally, MCX ranks no. 1 in silver, no. 2 in natural gas, no. 3 in crude oil and

gold in futures trading ([2])

The crude volume touched 23.49 Miliion barrels[3] on January 3, 2009

The highest traded item is gold with an average monthly turnover of Rs 1.42

Trillion ($29 Billion).

MCX has 10 strategic alliances with leading commodity exchange across the

globe

The average daily turnover of MCX is about US$ 2.4 billion [4]

MCX now reaches out to about 500 cities in India with the help of about

10,000 trading terminals

MCX COMDEX is India's first and only composite commodity futures price

index .

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METAL BULLION

Aluminium, Copper,

Lead, Nickel, Sponge

Iron, Steel Long

(Bhavnagar), Steel Long

(Govindgarh), Steel Flat,

Tin, Zinc

Gold, Gold HNI, Gold M, i-gold,

Silver, Silver HNI, Silver M

FIBER ENERGY

Cotton L Staple, Cotton

M Staple, Cotton S

Staple, Cotton Yarn,

Kapas

Brent Crude Oil, Crude Oil,

Furnace Oil, Natural Gas, M. E.

Sour Crude Oil, ATF, Electricity,

Carbon Credit

SPICES PLANTATIONS

Cardamom, Jeera,

Pepper, Red Chilli

Arecanut, Cashew Kernel, Coffee

(Robusta), Rubber

PULSES PETROCHEMICALS

Chana, Masur, Yellow

PeasHDPE, Polypropylene(PP), PVC

OIL & OIL SEEDS

Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton

Seed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard

Oil, Mustard Seed (Jaipur), Mustard Seed (Sirsa), RBD Palmolein,

Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC, Rice

Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds

CEREALS OTHERS

Maize

Guargum, Guar Seed, Gurchaku,

Mentha Oil, Potato (Agra),

Potato (Tarkeshwar), Sugar M-

30, Sugar S-30

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(MCX deals wit about 100 commodities.)

Major commodities traded:-

Gold:-

Gold is the oldest precious metal known to man. Therefore, it is a timely subject

for several reasons. It is the opinion of the more objective market experts that

the traditional investment vehicles of stocks and bonds are in the areas of their

all-time highs and may be due for a severe correction.

To fully appreciate why 8,000 years of experience say " gold is forever", we

should review why the world reveres what England's most famous economist,

John Maynard Keynes, cynically called the "barbarous relic."

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Why gold is "good as gold" is an intriguing question. However, we think that

the more pragmatic ancient Egyptians were perhaps more accurate in observing

that gold's value was a function of its pleasing physical characteristics and its

scarcity.

Gold is primarily a monetary asset and partly a commodity.

More than two thirds of gold's total accumulated holdings account as 'value for

investment' with central bank reserves, private players and high-carat

Jewellery.Less than one third of gold's total accumulated holdings is as a

'commodity' for Jewellery in Western markets and usage in industry.The Gold

market is highly liquid and gold held by central banks, other major institutionsand retail Jewellery keep coming back to the market.

Due to large stocks of Gold as against its demand, it is argued that the core

driver of the real price of gold is stock equilibrium rather than flow

equilibrium.South Africa is the world's largest gold producer with 394 tons in

2001, followed by US and Australia.

India is the world's largest gold consumer with an annual demand of 800 tons.

Silver:-

Silver's unique properties make it a very useful 'Industrial Commodity', despite

it being classed as a precious metal.Demand for silver is built on three main

pillars; industrial uses, photography and Jewellery & silverware accounting for

342, 205 and 259 million ounces respectively in 2002.Just over half of mined

silver comes from Mexico, Peru and United States, respectively, the first,

second and fourth largest producing countries. The third largest is

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Australia.Primary mines produce about 27 percent of world silver, while

around 73 percent comes as a by-product of gold, copper, lead, and zinc

mining.The price of silver is not only a function of its primary output but more a

function of the price of other metals also, as world mine production is more a

function of the prices of other metals.Often a faster growth in demand against

supply leads to drop in stocks with government and investors.

NMCX

(National Multi-Commodity Exchange of India Limited)

The first De-Mutualised Electronic Multi-Commodity Exchange of Indiagranted the National status on a permanent basis by the Government of India

and operational since 26th November 2002.NMCE facilitates electronic

derivatives trading through robust and tested trading platform, Derivative

Trading Settlement System (DTSS), provided by CMC.

When an order is placed on the exchange, the server at NMCE scans through the

orders posted on it from all its trading terminals. It then locates and matches the

best counter-offers/bids by maintaining anonymity of the counter-parties.

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Anonymity helps is eliminating formation of cartels and other unfair practices,

thereby protecting the efficiency of price-discovery at the Exchange. NMCE

was the first commodity exchange to provide trading facility through internet,

through Virtual Private Network (VPN).

NMCE follows best international risk management practices. The contracts are

marked to market on daily basis. The system of upfront margining based on

Value at Risk is followed to ensure financial security of the market. In the event

of high volatility in the prices, special intra-day clearing and settlement is held.

NMCE has also set up a Trade Guarantee Fund. Well-capitalized in-house

clearinghouse assumes counter-party risk of settlement. NMCE was the first to

initiate process of dematerialization and electronic transfer of warehoused

commodity stocks. The unique strength of NMCE is its settlements via a

Delivery Backed System, an imperative in the commodity trading business.

These deliveries are executed through a sound and reliable Warehouse Receipt

System, leading to guaranteed clearing and settlement.

List of Commodity traded:-

Cardamom , Castor Seed, Oil & Oilcake , Chana ,Coffee ,Copra, Coconut Oil

& Coconut Oil cake ,Cuminseed ,Gold Study ,Groundnut seed, oil & oil cake ,

Guar SeedS, Isabgul Seed ,Lin Seed ,Menthol Crystal ,Pepper ,Pulses

,Rape/Mustard Seed, Oil & Oil cake ,Raw Jute, Rubber ,Sacking ,Safflower

seed ,Salient features of Oil ,Sesame Seed Silver Study ,Soy Seed, Oil & Oil

cake ,Sugar ,Sunflower seed ,Turmeric Wheat

Major commodity traded:-

Coffee:-

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Coffeeis abrewed beverage prepared from roasted seeds, commonly called

coffee beans, of the coffee plant. Due to its caffeine content, coffee has a

stimulating effect in humans. Today, coffee is one of the most popular

beverages worldwide.[1]

Coffee was first consumed in the ninth century, when it was discovered in the

highlands ofEthiopia.[2] From there, it spread to Egypt and Yemen, and by the

15th century, had reached Armenia, Persia,Turkey, and northern Africa. From

the Muslim world, coffee spread to Italy, then to the rest ofEurope, to

Indonesia, and to the Americas.[3]

INTERNATIONAL COMMODITY EXCHANGES

Futures trading is a result of solution to a problem related to the maintenance of

a year round supply of commodities/ products that are seasonal as is the case of

agricultural produce. The United States, Japan, United Kingdom, Brazil,

Australia, Singapore are homes to leading commodity futures exchanges in theworld.

The New York Mercantile Exchange (NYMEX):-

The New York Mercantile Exchange is the worlds biggest exchange for trading

in physical commodity futures. It is a primary trading forum for energy products

and precious metals. The exchange is in existence since last 132 years and

performs trades trough two divisions, the NYMEX division, which deals in

energy and platinum and the COMEX division, which trades in all the other

metals.

Commodities traded: -Light sweet crude oil, Natural Gas, Heating Oil,

Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper,

Aluminum, Platinum, Palladium, etc.

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London Metal Exchange:-

The London Metal Exchange (LME) is the worlds premier non-ferrous market,

with highly liquid contracts. The exchange was formed in 1877 as a direct

consequence of the industrial revolution witnessed in the 19th century. The

primary focus of LME is in providing a market for participants from non-

ferrous based metals related industry to safeguard against risk due to movement

in base metal prices and also arrive at a price that sets the benchmark globally.

The exchange trades 24 hours a day through an inter office telephone market

and also through a electronic trading platform. It is famous for its open-outcry

trading between ring dealing members that takes place on the market floor.

Commodities traded:- Aluminum, Copper, Nickel, Lead, Tin, Zinc,

Aluminum Alloy, North American Special Aluminum Alloy (NASAAC),

Polypropylene, Linear Low Density Polyethylene, etc.

The Chicago Board of Trade:-

The first commodity exchange established in the world was the Chicago Board

of Trade (CBOT) during 1848 by group of Chicago merchants who were keen

to establish a central market place for trade. Presently, the Chicago Board of

Trade is one of the leading exchanges in the world for trading futures andoptions. More than 50 contracts on futures and options are being offered by

CBOT currently through open outcry and/or electronically. CBOT initially dealt

only in Agricultural commodities like corn, wheat, non storable agricultural

commodities and non-agricultural products like gold and silver.

Commodities Traded: -Corn, Soybean, Oil, Soybean meal, Wheat, Oats,

Ethanol, Rough Rice, Gold, Silver etc.

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Tokyo Commodity Exchange (TOCOM):-

The Tokyo Commodity Exchange (TOCOM) is the second largest commodity

futures exchange in the world. It trades in to metals and energy contracts. It has

made rapid advancement in commodity trading globally since its inception 20

years back. One of the biggest reasons for that is the initiative TOCOM took

towards establishing Asia as the benchmark for price discovery and risk

management in commodities like the Middle East Crude Oil. TOCOMs recent

tie up with the MCX to explore cooperation and business opportunities is seen

as one of the steps towards providing platform for futures price discovery in

Asia for Asian players in Crude Oil since the demand-supply situation in U.S.that drives NYMEX is different from demand-supply situation in Asia. In Jan

2003, in a major overhaul of its computerized trading system, TOCOM fortified

its clearing system in June by being first commodity exchange in Japan to

introduce an in-house clearing system. TOCOM launched options on gold

futures, the first option contract in Japanese market, in May 2004.

Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver,Platinum, Aluminum, Rubber, etc

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

some one 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

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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.

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

- Price limits

- Position limits

II. Clearing: - This stage has following system in place-

-Matching

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- 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.

How to invest in a Commodity Market?

With whom investor can transact a business?

An investor can transact a business with the approved clearing member of

previously mentioned Commodity Exchanges. The investor can ask for the

details from the Commodity Exchanges about the list of approved members.

What is Identity Proof?

When investor approaches Clearing Member, the member will ask for identity

proof. For which Xerox copy of any one of the following can be given

a) PAN card Number

b) Driving License

c) Vote ID

d) Passport

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What statements should be given for Bank Proof?

The front page of Bank Pass Book and a canceled cheque of a concerned bank.

Otherwise the Bank Statement containing details can be given.

What are the particulars to be given for address proof?

In order to ascertain the address of investor, the clearing member will insist on

Xerox copy of Ration card or the Pass Book/ Bank Statement where the address

of investor is given.

What are the other forms to be signed by the investor?

The clearing member will ask the client to sign

a) Know your client form

b) Risk Discloser Document

The above things are only procedure in character and the risk involved and only

after understanding the business, he wants to transact business.

What aspects should be considered while selecting a commodity

broker?

While selecting a commodity broker investor should ideally keep certain aspects

in mind to ensure that they are not being missed in any which way. These

factors include

Net worth of the broker of brokerage firm.

The clientele.

The number of franchises/branches.

The market credibility.

The references.

The kind of service provided- back office functioning being most

important.

Credit facility. The research team.

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These are amongst the most important factors to calculate the credibility of

commodity broker.

Broker:-The Broker is essentially a person of firm that liaisons between individual

traders and the commodity exchange. In other words the Commodity Broker is

the member of Commodity Exchange, having direct connection with the

exchange to carry out all trades legally. He is also known as the authorized

dealer.

How to become a Commodity Trader/Broker of

Commodity Exchange?

To become a commodity traderone needs to complete certain legal and binding

obligations. There is routine process followed, which is stated by a unit of

Government that lays down the laws and acts with regards to commodity

trading. A broker of Commodities is also required to meet certain obligations to

gain such a membership in exchange.

To become a member of Commodity Exchange the broker of brokerage firm

should have net worth amounting to Rs. 50 Lakh. This sum has been determined

by Multi Commodity Exchange.

How to become a Member of Commodity Exchange?

To become member of Commodity Exchange the person should comply with

the following Eligibility Criteria.

1. He should be Citizen of India.

2. He should have completed 21 years of his age.

3. He should be Graduate or having equivalent qualification.

4. He should not be bankrupt.

5. He has not been debarred from trading in Commodities by

statutory/regulatory authority.

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Current Scenario in Indian Commodity Market

Need of Commodity Derivatives for India:-

India is among top 5 producers of most of the Commodities, in addition to being

a major consumer of bullion and energy products. Agriculture contributes about

22% GDP of Indian economy. It employees around 57% of the labor force on

total of 163 million hectors of land Agriculture sector is an important factor in

achieving a GDP growth of 8-10%. All this indicates that India can be promoted

as a major centre for trading of commodity derivatives.

Trends in volume contribution on the three National

Exchanges:-

Pattern on Multi Commodity Exchange (MCX):-

MCX is currently largest commodity exchange in the country in terms of trade

volumes, further it has even become the third largest in bullion and second

largest in silver future trading in the world.

Coming to trade pattern, though there are about 100 commodities traded on

MCX, only 3 or 4 commodities contribute for more than 80 percent of total

trade volume. As per recent data the largely traded commodities are Gold,

Silver, Energy and base Metals. Incidentally the futures trends of these

commodities are mainly driven by international futures prices rather than the

changes in domestic demand-supply and hence, the price signals largely reflectinternational scenario.

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Among Agricultural commodities major volume contributors include Gur, Urad,

Mentha Oil etc. Whose market sizes are considerably small making then

vulnerable to manipulations.

Pattern on National Commodity & Derivatives

Exchange (NCDEX):-

NCDEX is the second largest commodity exchange in the country after MCX.

However the major volume contributors on NCDEX are agricultural

commodities. But, most of them have common inherent problem of small

market size, which is making them vulnerable to market manipulations and over

speculation. About 60 percent trade on NCDEX comes from guar seed, chana

and Urad (narrow commodities as specified by FMC).

Pattern on National Multi Commodity Exchange

(NMCE):-

NMCE is third national level futures exchange that has been largely trading in

Agricultural Commodities. Trade on NMCE had considerable proportion of

commodities with big market size as jute rubber etc. But, in subsequent period,

the pattern has changed and slowly moved towards commodities with small

market size or narrow commodities.

Analysis of volume contributions on three major national commodity exchanges

reveled the following pattern,

Major volume contributors: -Majority of trade has been concentrated in

few commodities that are

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Non Agricultural Commodities (bullion, metals and energy)

Agricultural commodities with small market size (or narrow commodities)

like guar, Urad, Mentha etc.

Trade strategy:-

It appears that speculators or operators choose commodities or contracts where

the market could be influenced and extreme speculations possible.

In view of extreme volatilities, the FMC directs the exchanges to impose

restrictions on positions and raise margins on those commodities. Consequently,

the operators/speculators chose another commodity and start operating in a

similar pattern. When FMC brings restrictions on those commodities, theoperators once again move to the other commodities. Likewise, the speculators

are moving from one commodity to other (from methane to Urad to guar etc)

where the market could be influenced either individually or with a group.

LIMITATIONS:

Due to bad market conditions people are becoming more and more pessimistic

about investing in the share market. After the Reliance IPO, SENSEX fell

tremendously from 21000 to 15000. In this crash many people lost their money

amounting from 2 Lakhs to 4-5 crore or even more. So when we approach them

they tell us how much they used to trade in shares and how much money they

have lost in the share market. They even tell us that we are doing our training

(SIP) at very wrong time.

While telecalling sometimes the clients do not give positive response, may be

because they are really busy or may be not interested in the demat accounts and

mutual funds.

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While cold calling when we met the owners of big shops. They said that if they

had spare money they will invest it in their shops and not in the share market.

They don`t want to take risk.

There are some negative rumors in the market about Sharekhan ltd. some people

have very bad experience with Sharekhan in terms of services and charges. This

may not be the fault of the company but of some of the marketing executives who

don`t disclose all the details about charges and products and once the demat

account has been opened they don`t pay any attention to their old clients and thus

fail to give proper services to the clients.

Sharekhan takes no charges for opening Demat accounts but there is a initial

deposit of Rs.10,000/-. It is just a margin money which has to be kept with

Sharekhan till the account opens. As soon as the account opens this money can be

kept as it is in the demat account or it can be completely used for buying shares

or it can be partially used and the rest of the amount can be withdrawn. But

clients fail to understand this. They think that these are the charges they start

suspecting it. So its very difficult to convince them to deposit that much amount

and open a demat account.

Quantitative Analysis

ANALYSIS

(Sample size 30 peoples)

Survey was conducted across Udaipur City to judge the awareness of peoples

regarding investment in Commodity Market.

1. Investors preferences: -

46

43%

27%

23%

7%

Other

Share Mark

Bank F.D.

CommodityMarket


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Investment Prefrences specified in other category

67%

30%

3%

Real Estate

Jwelary

Not Specified

Analysis of data revels that majority of people prefer investment in Real Estate

(28.81% of total sample) which specified in other category investment and it is

greater than share market investment preference.

2. Peoples knowledge about Commodity Market: -

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13%

87%

Know

Dont Know

Very few people heard of commodity market. Vast majority of people are

unaware about Commodity Market.

3. Investors interested to invest in Commodity Market: -

(Out of those, who know Commodity Market)

50%50%

Interested

Not Intereste d

Though some people heard of commodity market due to lack of complete

knowledge about it half of then are not interested in investing in Commodity

Market.

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4.Commodity Market Investors Preferences

37%

30%

20%

13%Bullion

Metals

Agricultural

Fossils/Energy

Above data revels that majority of commodity investors like to invest in Bullion

(Gold & Silver).

5. Perception about Commodity Market:-

25%

25%

50%

Less Risky

Risky

Very Risky

Analysis of data shows that majority of people who are aware about commodity

market; feel that investment in commodity market is very risky. So efforts

should be done to minimize the risk in commodity investment and make peoples

about minimum risk in commodity investment.

6. Opinion about Commodity Market Advertisements:-

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(Expressed by those who know commodity market)

100

Not Informative

There is no second opinion amongst commodity investors, that commodity

market advertisements do not give all the necessary information.

ANNEXURE

Terms and Definitions related to Commodity Market: -

Accruals:- Commodities on hand ready for shipment, storage and

manufacture

At the Market:- An order to buy or sell at the best price possible at the

time an order reaches the trading pit.

Basis: - Basis is the difference between the cash price of an asset andfutures

price of the underlying asset. Basis can be negative or positive depending on the

prices prevailing in the cash and futures.

Bear: -A person who expects prices to go lower.

Bid: - A bid subject to immediate acceptance made on the floor of exchange

to buy a definite number of futures contracts at a specific price.

Breaking:- A quick decline in price.

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Bulging: - A quick increase in price.

Bull: - A person who expects prices to go higher.

Buy on Close: - To buy at the end of trading session at the price within the

closing range.

Buy on opening: - To buy at the beginning of trading session at a price

within the opening range.

Call: - An option that gives the buyer the right to a long position in the

underlying futures at a specific price, the call writer (seller)may be assigned a

short position in the underlying futures if the buyer exercises the call.

Close: - The period at the end of trading session officially designated by

exchange during which all transactions are considered made at the close.

Closing price: - The price (or price range) recorded during the period

designated by the exchange as the official close.

Commission house: -A concern that buys and sells actual commodities or

futures contract for the accounts of customers.

Delivery: - The tender and receipt of actual commodity, or in case of

agriculture commodities, warehouse receipts covering such commodity, in

settlement of futures contract. Some contracts settle in cash (cash delivery). In

which case open positions are marked to market on last day of contract based on

cash market close.

Delivery month: - Specified month within which delivery may be made

under the terms of futures contract.

Delivery notice: - A notice for a clearing members intention to deliver astated quantity of commodity in settlement of a short futures position.

Derivatives: - These are financial contracts, which derive their value from

an underlying asset. (Underlying assets can be equity, commodity, foreign

exchange, interest rates, real estate or any other asset.) Four types of derivatives

are trades forward, futures, options and swaps. Derivatives can be traded either

in an exchange or over the counter.

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Exchange: -Central market place for buyers and sellers. Standardized

contracts ensure that the prices mean the same to everyone in the market. The

prices in an exchange are determined in the form of a continuous auction by

members who are acting on behalf of their clients, companies or themselves.Futures Contract:- It is an agreement between two parties to buy or sell a

specified and standardized quantity and quality of an asset at certain time in the

future at price agreed upon at the time of entering in to contract on the futures

exchange.It is entered on centralized trading platform of exchange. It is

standardized in terms of quantity as specified by exchange. Contract price of

futures contract is transparent as it is available on centralized trading screen of

the exchange. Here valuation of Mark-to-Mark position is calculated as per theofficial closing price on daily basis and MTM margin requirement exists.

Futures contract is more liquid as it is traded on the exchange. In futures

contracts the clearing-house becomes the counter party to each transaction,

which is called novation. Therefore, counter party risk is almost eliminated. A

regulatory authority and the exchange regulate futures contract. Futures contract

is generally cash settled but option of physical settlement is available. Delivery

tendered in case of futures contract should be of standard quantity and quality as

specified by the exchange.

Hedging: -Means taking a position in futures market that is opposite to

position in the physical market with the objective of reducing or limiting risk

associated with price.

Investment Commodities: - An investment commodity is generally held

for investment purpose. e.g. Gold, Silver

Limit: - The maximum daily price change above or below the price close ina specific futures market. Trading limits may be changed during periods of

unusually high market activity.

Liquidation: - A transaction made in reducing or closing out a long or

short position, but more often used by the trade to mean a reduction or closing

out of long position.

Margin: -Cash or equivalent posted as guarantee of fulfillment of a futures

contract (not a down payment).

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Margin call: - Demand for additional funds or equivalent because of

adverse price movement or some other contingency.

Net position: - The difference between the open contracts long and the open

contracts short held in any commodity by any individual or group.

Offer: -An offer indicating willingness to sell at a given price (opposite of

bid).

Open contracts: -Contracts which have been brought or sold without the

transaction having been completed by subsequent sale, repurchase or actual

delivery or receipt of commodity.

Open interest: -The number of open contracts. It refers to unliquidated

purchases or sales and never to their combined total.

Option: - It gives right but not the obligation to the option owner, to buy an

underlying asset at specific price at specific time in the future.

Position: -An interest in the market in the form of open commodities.

Premium:- The amount by which a given futures contracts price or

commoditys quality exceeds that of another contract or commodity (opposite of

discount). In options, the price of a call or put, which the buyer initially pays to

the option writer (seller).

Price limit: -The maximum fluctuation in price of futures contract

permitted during one trading session, as fixed by the rules of a contract market.

Purchase and sales statement: -A statement sent by FMC to a

customer when his futures option has been reduced or closed out (also called P

and S)

Range: -The difference between high and low price of the futures contract

during a given period.

Settlement price:- The official daily closing price of futures contract, set

by the exchange for the purpose of setting margins accounts.

Spot Markets:-Here commodities are physically brought or sold on a

negotiated basis.

Spot price: -The price at which the spot or cash commodity is selling on

the cash or spot market.

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Questionnaire

COMMODITY MARKET(Questionnaire for Investors)

Name:-..

Address: ...

Phone No. :-..

1. Do you have any investment plan?

a. YES b. NO

(If no move to question no. 4)

2. If, yes, where you would like to invest/trade your money?

a. Bank F.D. b. Share Market

c. Commodity Market d. Other (specify).

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3. Why you prefer specific investment?

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4. If no, why?

a. Not aware about invest avenues b. Insufficient income

c. Other (specify).

5. Do you aware about Commodity Market?

a. YES b. NO

(If no move to question no 12)

6. Are you willing to invest in Commodity Market?

(If in Q. 2 Commodity Market, skip this question)

a. If YES, why?

------------------------------------------------------------------------------------------------

----------------------------------------------------

b. If NO, why?

------------------------------------------------------------------------------------------------

-----------------------------------------------------

(If no move to the Question no.10)

7. If yes, which Commodity Exchange you will prefer for investment?

a. MCX b. NCDEX

c. NMCE d. Other (specify).

f. Cant Say

8. Why you prefer specific Commodity Exchange for investment?

(if answer to Q.7 f, skip this questi

Documents

Ravi Pro. Sharekhan