What Are The Benefits Of Commodity Exchange

There are two types of commodities - soft commodities and hard commodities. Soft commodities consists of agricultural products like wheat, cocoa, fruits and more. Hard commodities are the products that can be mine like gold, silver, oil and more.

The objective of the commodity exchange is to provide an effective and competitive marketplace for trading. It enforces rules and regulations for the trading of commodities and the contracts. It is a physical centre where the trading actually takes place. The contracts at the exchange are standardized. There is no difference between the commodity coming from one producer and the same commodity coming from the another producer. The commodity is the same regardless of the producer. All the commodities of the same type have the same price. The commodities traded at the exchange have to meet a minimum quality standard. The exchange settles futures contract, offers settlement guarantee fund and follows risk management practices. Thus commodity exchange is important for trading and these are the benefits of commodity exchange.

The commodity market works on the economic principle of supply and demand. If the supply is less than the demand then the prices of the commodities go up. When there is a surplus of any commodity the producer will reduce the price to clear the market. The reduced prices will drive up the sales.

Types of commodity exchange

The commodity exchanges of India are as follows:

• Multi commodity exchange (MCX)
• National spot exchange limited (NSEL)
• Indian commodity exchange limited (ICEX)
• National commodity and derivatives exchange limited (NCDEX)
• National Multi-commodity exchange of India (NMCE)
• Chamber of commerce - Hapur (COC)
• Ace derivatives and commodity exchange (ACE)
• Bhatinda Om & oil exchange ltd. (BOOE)
• Universal commodity exchange (UCX)

Commodity derivative

A derivative is a contract between the parties whose value lies in the underlying asset, index or securities. The types of commodity derivatives are the futures contract, options, forwards contract, swaps and warrants. The futures contract is the most commonly used method of trading.

A futures contract is a contract between the two parties to buy or sell a commodity at a future price and a date. Farmers use this method to trade. A farmer may agree to produce the commodity and the miller may agree to supply the commodity. If the prices rise then the farmer will not be able to make a profit. If the prices fall then the miller will have to pay more. The contract can be settled physically or by cash.

Shaeen Patel guides clients in online trading of commodities. She works for a firm. She trades at the MCX and the NCDEX exchanges. She knows the benefits of commodity exchange where she trades.

To trade online you need a demat account. The demat account is used to store the shares when you trade online. You can open a demat account by approaching a depository participant (DP). There are many benefits of a demat account.