MCX Commodity Future Contracts

What are MCX Commodity Future Contracts?

• Commodities such as grains, basic food products, metals and energy products trade through standardized contracts called Futures Contracts. A commodity futures contract is for the future delivery of a specified amount of a commodity. Commodity contracts are used by buyers and sellers of the commodities to lock in future delivery price and by traders looking to profit from commodity price changes.

It is an 'agreement' to trade a set amount of a commodity at a predetermined price and date. Buyers use these to avoid the risks associated with the price fluctuations of the product or raw material, while sellers try to lock in a price for their products. Like in all financial markets, others use such contracts to take chance on price movements. There are many benefits as well as dangers of trading in commodity futures

Benefits of trading in commodity futures- 

• Can buy (go long) or sell (go short) commodity futures contracts- Commodity future's trading allows the trader to either buy or sell the contract. If the trader thinks the price of the commodity will go up, they buy the contract and hope to sell it back in the future at a higher price for a profit. On the other hand, a trader who thinks the price of the commodity will decrease can sell the contract and buy it back later hopefully for a profit.

Commodity Trading has high rewards

• Can trade with a small amount of capital- Since commodity trading utilizes leverage, it is possible to trade without a lot of upfront Trading capital. Additionally, there is no interest charged for the use of Leverage as there is for margin trading in stocks.

• Volatility in some markets offers potential for quick profits- Some contracts such as Gold, Crude Oil, Silver, gasoline offer large price fluctuations at times. This makes for a dynamic market where quick profits can be made.

• Risk management- Risk management is a major benefit for commodity traders in India. Exchanges have well structured settlement procedures and risk management practices, which reassures an investor.Clearing houses stands as a legal counter party between the buyer and the seller; thus the clearing house becomes buyer to every seller and seller to every buyer. Due to this, there is no need to examine the credit-worthiness of each counter party, which makes the entire process of trading easier.

Dangers of trading in Commodity Futures-  

• Principal is not guaranteed- Like trading stocks, there is no guarantee of your initial investment. However, in buying stock in a company, your loss is limited to the amount you paid for the stock. In commodity futures trading, losses can mount to a greater amount then your initial margin used to open the position and additional capital through margin calls may be necessary if the market goes against your position.

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  Commodity Trading comes high risks also

  High risk due to Leverage- As written on the benefits page, using leverage only requires a small amount of initial capital to initiate a new position and price volatility can lead to big profits or big losses. That is why many people suggest using stop losses to limit potential losses.
• High price volatility could lead to margin calls- A margin call is when the market is going against your position and additional capital is required. At this time, additional margin will be deducted from your account balance. If there are insufficient funds in your account, your broker will notify you of the additional amount that is required. If these additional funds are not promptly deposited into the trader's account, their positions will be automatically liquidated by the broker.

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