Overview about futures and commodity trading

In essence, buying a futures contract is the same as buying many units of stock from the cash market. The primary difference is that you do not take immediate delivery in the event of purchasing a future.

Let us look at the fundamentals of future investing and ways to go about futures trading.

The definition of the future is essential to consider. Futures are nothing but a financial contract that allows the buyer, at a pre-determined future date and a pre-determined price, to buy an asset or the seller to sell an asset.

So, how to trade futures?

Futures trading by investors in India is on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Let us understand the Indian futures trade.

  • Futures are complicated financial instruments that vary from other instruments, such as inventories and mutual funds. For a person investing in stocks for the first time, trading in futures will prove to be a challenge. You require to know how futures operate, as well as the risks and costs associated with them if you want to start investing in futures.
  • Although all of us want to make gains in the markets, in futures trading, one can also lose money. Know your risk appetite before you get into how to invest in futures. Be aware of how much money you can afford to lose, and if your lifestyle would be affected by losing the sum.
  • Determining one’s approach to future trading is essential. You may want to purchase futures based on your expertise and study. You can also employ an expert to assist you with the same thing.

Commodity futures trading

Commodity futures on commodity markets are acquired and sold. These include exchanges such as the London Metals Exchange (LME), the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), etc. Trading in such futures takes place in India on exchanges such as the Multi-Commodity Exchange (MCE) and the National Exchange of Commodities and Derivatives (NCDEX).

Features of commodity futures trading

  • Trading of commodities is very structured and takes place on commodity exchanges such as NYMEX in the United States, MCX and NCDEX in India.
  • There is a high standardisation of the contracts. The markets in which they are exchanged decide the quantity, consistency, commodity futures prices, and time.
  • You must deposit what is called an initial margin with the broker before you can trade in these futures.
  • Markets for commodities futures are tracked to ensure fair practices. The Forward Markets Commission used to be the agency that controlled the trading of commodity futures in India. But it was merged with the India Securities & Exchange Board (SEBI) in 2015.

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