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Understanding Commodity Futures: Meaning, Types & Benefits

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Anshika

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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.

What are Commodity Futures in Trading

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.

How Commodity Futures Work

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)

Example:

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.

Features of commodity market

  • 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.

Types of Commodity Futures in India

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.

Key Benefits of Commodity Futures

Commodity futures provide important benefits to traders and investors, including:

Hedging Against Price Fluctuations

Producers and consumers can protect against adverse price movements.

Portfolio Diversification

Commodities often move inversely to equities or bonds, offering balance.

High Liquidity

Popular contracts (e.g., gold, crude oil) are actively traded, allowing easy entry and exit.

Leverage Advantage

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.

Participants in Commodity Futures

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

Risks in Commodity Futures

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

How Are Commodity Futures Traded in India

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).

Margin in Commodity Futures

To trade futures, you must deposit an initial margin (a percentage of contract value). This varies by commodity and volatility.

Example Formula:

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.

Taxation of Commodity Futures in India

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

Factors Affecting Commodity Prices

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

Conclusion

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.

Disclaimer

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.

FAQs

Can retail investors trade commodity futures in India?

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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Hi! I’m Anshika
Financial Content Specialist

Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

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