1. What are commodities?
2. What is a derivative?
3. What is Futures Contract?
4. What is a Commodity Exchange?
5. What is the Commodities Market?
6. Why trade in the Commodities Market?
7. What is Hedging?
8. What is Speculation?
9. What are Margins?
10. Who are the Market Participants?
11. What are the different Commodity Exchanges in India?

1. What are commodities?
Commodities are raw materials of a wide variety of areas:
Grains - Corn, Soybeans, Wheat
Livestock - Cattle, Hogs
Precious Metals - Gold, Platinum, Silver
Industrials - Cotton, Copper
Softs - Cocoa, Coffee, Sugar, Orange Juice
Energy - Crude Oil, Heating Oil, Natural Gas

2. What is a derivative?

A derivative contract is an enforceable agreement whose value is derived from the value of an underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or, indices of commodities, stocks etc. Four most common examples of derivative instruments are forwards, futures, options and swaps/spreads.

3. What is Futures Contract?

Futures are exchange - traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price. Futures contracts are used generally for protecting against rich of adverse price fluctuation (hedging).

4. What is a Commodity Exchange?
Commodity exchanges are centers where futures trade is organized in a wider sense. It is taken to include any organized market place where trade is routed through one mechanism, allowing effective competition amongst buyers and among sellers.

5. What is the Commodities Market?

The commodities market consists of the trading of forward contracts or futures contracts; forward contracts are contractual agreements to buy/sell any commodity between two entities; futures contracts are market agreements to buy/sell very specific commodities between two entities over a recognized commodities exchange.

6. Why trade in the Commodities Market?

Commodities present an exciting alternative investment and trading tool, but it is important to be well prepared to enter the markets. Futures prices are not price predictions, but are the collective current opinion of the marketplace of where prices appear to be heading. That opinion, and the direction of prices, can change in an instant, which makes trading these markets so challenging and potentially rewarding.

7. What is Hedging?

Hedging is a mechanism by which the participants in the physical/cash markets can cover their price risk. Theoretically, the relationship between the futures and cash prices is determined by cost of carry. The two prices therefore move in tandem. This enables the participants in the physical/cash markets to cover their price risk by taking opposite position in the futures market.

8. What is Speculation?

Speculation involves selecting investments with higher risk in order to profit from an anticipated price movement. It is expectation driven and uses market opportunities to increase ones profitably.

9. What are Margins?

Margin money is the minimum balance that needs to be maintained in the exchange to buy or sell a contract. Investors generally use margin to increase their purchasing power so that they can own more stock without fully paying for it.

10. Who are the Market Participants?

Hedgers, speculators and arbitrageurs are the three classes of investors having divergent goals, which is why their presence in the markets complements each other so well.

Hedgers - Hedgers wish to eliminate price risk from their already existing exposures and are essentially safety driven.

Speculators - Speculators willingly take price risks to profit from price changes and are expectation driven.

Arbitrageurs - Arbitrageurs profit from price differential existing in two markets by simultaneously operating in two different markets.

11. What are the different Commodity Exchanges in India?

The three major Commodity Exchanges operating in India are: -
NCDEX (National Commodity and Derivatives Exchange),
NMCEIL (National Multi Commodity Exchange Of India Limited) and
MCX (Multi Commodity Exchange).