Taking part in futures

Futures trading is an important part of commodities trading along with the spot market.

It is a contract entered into by two buyers, one to sell and the other to buy, at a later date and at a specified price fixed on the day the deal is signed.

The objective for a buyer is to ensure that he/she ensures supply at a competitive price.

For a seller, futures contract ensures a price that he/she expects.

Futures trading in commodities results in a transparent and fair price discovery process on account of large-scale participation of entities associated with different value chains.

This reflects the views and expectations of a wider section of people related to a particular commodity.

The trading provides an effective platform for price risk management for all segments of players, ranging from producers, traders, processors, exporters/importers to end-users of the commodity.

The trading on futures contract platform will be facilitated through an online platform for a wide range of commodity derivatives.

An investor can participate in futures trading through an exchange broker who will be a member of any of the commodity futures exchange. In India, there are exchanges such as the National Commodities and Derivatives Exchange, Multi Commodity Exchange, National Multi Commodity Exchange and the ACE.

To take part in futures trading, one will have to have an account with the broker and pay money upfront to enter into any contract.

The money will be a percentage of the sum that will have to be paid on taking delivery of the contract.

However, not all contracts will have to result in deliveries.

An investor can always square off his/her position.

This means, if you have bought a contract of a particular commodity that expires three months from now, you can always sell it before the contract expires.

Similarly, if you have sold a contract of a commodity, you can buy that before contract expiry.

But an investor will have to ensure that the squaring off doesn’t lead to any heavy losses, though losses and gains are part of such trading.