What are Spot and Futures Prices In Commodity?
Spot price is the price at which we direct buy a commodity by giving cash. There are also separate retail and wholesale prices. Future commodity prices expressions future date are the same. As such, the price of gold spot is Rs 16,800 per ten gram then today’s futures prices can be 16,900 rupees a month and two-month’s futures price may be Rs 17,150. The difference between Futures and spot price is called “cost of carry”. The cost of interest, storage and insurance, etc. is counted on it.
Generally Future’s prices are higher than the spot price but if the opposite happens, it says “Backwardation”.
The commodity futures contract is an agreement between two sides to buy or sell of a specified quantity and quality of a commodity at a certain date. Futures contracts are different than the forward contract in the sense that they (Futures contracts) have certain standards and trades on commodity exchange. In other words, buyers and sellers do not set futures contracts conditions, but they are required to accept the terms and conditions prescribed by the Exchange standard.
What Are Commodity Exchange?
Exchange, where various commodities and derivatives products are traded is called Commodity exchange or in other words, commodity exchange is an institution that provides the platforms for commodity futures trading, just as the stock exchange provides platform of shares and their derivatives (futures, options). Commodity exchange in India currently feature more than 120 commodities are trading in futures.
What is Commodity Exchange Traded Fund (ETF)?
Commodity ETF-that invest in physical commodities such as precious metals, agricultural goods and natural resources. A commodity ETF may be focused on a single commodity and hold it in physical storage or may invest in futures contracts. Gold ETFs are based on “electronic gold” that does not entail the ownership of physical bullion.
World’s first commodity exchange-
World’s first commodity exchange, the Chicago Board of Trade (CBOT) which formed in 1848 in Chicago, was put together by some traders. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and electronic trading.
The law applies to Commodity Exchange in India-
Commodity Exchange of India is operated under Forward Contracts Regulation Act, 1952. Regulatory body of these exchanges is Forward Markets Commission (FMC), which is under the ministry of the food, consumer and supply. FMC decides that which commodity futures can be traded. FMC was formed in 1953 and is headquartered in Mumbai.
What is NTSG Contract?
NTSG stands for “Non Transferable Specific Contracts”. means a specific delivery contract, the rights or liabilities under which or under any delivery order, railway receipt, bill of lading, warehouse receipt or any other documents of title relating thereto are not transferable.
Under the contract, the rights and obligations associated with the delivery of ordered goods, railway receipts and other documents cannot be changed by anyone else
Benefits To Retail Investor By Investing In Commodity Market-
First, the commodity market is a medium of an independent investment which is different from the moves of stock market. Therefore it should be included in your investment. Another thing is that in periods of high inflation where stock prices are falling, the price of the commodity and its derivatives increases therefore the other side (loss side) can be overcome by side (profit side) that’s why commodity market can be use for Hedging.
The right balance of stocks and commodities in your portfolio can make your investments more lucrative.