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Commodity futures are crucial for managing price risks and speculating across agriculture, energy, and metals. They’re important tools for businesses, traders, and retail investors seeking exposure to this asset class.
Commodity futures trading are standardised contracts to buy or sell a specific quantity of a commodity at a predetermined price on a future date. These contracts are traded on regulated commodity exchanges and help in price discovery and risk management.
Unlike spot markets, where actual commodities are bought or sold immediately, futures are agreements for future delivery, although most are squared off before expiry.
Each futures contract specifies:
Underlying commodity (e.g., gold, crude oil, wheat)
Lot size (fixed quantity of the commodity)
Expiry date
Tick size (minimum price movement)
Margin requirement (initial and maintenance)
If you buy 1 lot of gold futures at ₹60,000 per 10 grams with expiry in August, you agree to buy 10 grams of gold at ₹60,000 on expiry day unless you square off your position earlier.
Trade in tangible goods – Deals in physical commodities like metals, energy, and agricultural products.
Standardised contracts – Uses uniform quality, quantity, and delivery terms.
Price discovery – Prices determined by demand, supply, and global market trends.
Hedging & risk management – Enables participants to protect against price fluctuations.
Leverage – Allows trading with a margin, amplifying both gains and losses.
Two settlement modes – Physical delivery or cash settlement on contract expiry.
Regulated environment – Overseen by bodies like SEBI in India for transparency and fairness.
Commodity futures in India cover various categories, including the following key examples:
Category |
Examples |
|---|---|
Precious Metals |
Gold, Silver, Platinum |
Base Metals |
Copper, Zinc, Aluminium |
Energy |
Crude Oil, Natural Gas |
Agro Commodities |
Cotton, Wheat, Guar, Chana |
Others |
Mentha Oil, Rubber, Palm Oi |
These commodities are traded mainly on MCX (Multi Commodity Exchange) and NCDEX (National Commodity & Derivatives Exchange) in India.
Commodity futures provide important benefits to traders and investors, including:
Producers and consumers can protect against adverse price movements.
Commodities often move inversely to equities or bonds, offering balance.
Popular contracts (e.g., gold, crude oil) are actively traded, allowing easy entry and exit.
Futures trading allows exposure to large contract values with limited capital via margins. However, leverage increases both potential returns and risks.
Note: Leverage can amplify both gains and losses.
Various market participants engage in commodity futures trading, each with distinct roles:
Participant |
Role |
|---|---|
Hedgers |
Farmers, manufacturers, and businesses locking in prices |
Speculators |
Traders looking to profit from price fluctuations |
Arbitrageurs |
Exploit price differences between markets or contracts |
Investors |
Include commodity futures as part of a diversified portfolio |
Commodity futures carry several risks that you should consider:
Risk |
Description |
|---|---|
High Volatility |
Commodities can be affected by global, weather, or geopolitical factors |
Leverage Risk |
Small margin means a small price change can lead to large losses |
Complexity |
Understanding demand-supply dynamics, expiry cycles is essential |
Regulatory Changes |
Market rules can change based on global or domestic developments |
Commodity trading in India is regulated by SEBI. You need:
A commodity trading account with a registered broker
PAN and KYC verification
Margins as per exchange guidelines (initial and mark-to-market)
Trades are executed electronically via platforms like MCX’s trading terminal or broker platforms (e.g., Zerodha, Angel One, Upstox).
To trade futures, you must deposit an initial margin (a percentage of contract value). This varies by commodity and volatility.
Initial Margin = Lot Size × Futures Price × Margin %
If Gold = ₹60,000, Lot Size = 1 (10g), Margin = 10%
Initial Margin = 1 × ₹60,000 × 10% = ₹6,000
Brokers may demand additional margins in volatile markets.
Profits from commodity futures are classified under business income. They are taxed based on your income slab and need to be declared in your Income Tax Return (ITR) under F&O trading.
Turnover = Absolute profits/losses + Premiums received
Audit is applicable if turnover exceeds limits as per Income Tax rules
Several factors influence commodity prices, including:
Factor |
Impact |
|---|---|
Supply-demand imbalance |
Directly affects price movement |
Geopolitical tensions |
Especially for oil and metals |
Currency movements |
Commodities are globally priced in USD |
Government policies |
Export-import duties, subsidies, MSPs |
Weather conditions |
Crucial for agricultural commodities |
Commodity futures offer an effective mechanism for price risk management, hedging, and diversification. Beginners should start with limited exposure and gradually build experience in commodity trading with a risk-managed approach.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Yes, individuals can trade commodities through SEBI-registered brokers with proper KYC.
No. Most contracts are cash-settled or squared off before expiry.
It depends on the margin for each commodity. For gold or silver, it could range from ₹5,000 to ₹15,000 per lot.
They are typically short-term instruments used for trading or hedging, not long-term investment vehicles.
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