In this article we will discuss about:- 1. Classification of Commodity Market 2. Characteristics 3. Functions 4. Services Rendered 5. Types of Transactions.
- Classification of Commodity Market
- Characteristics of Commodity Market
- Functions of Commodity Market
- Services Rendered by Commodity Market
- Types of Transactions in Commodity Markets
1. Classification of Commodity Market:
A commodity market or a commodity exchange can be defined as an organisation or association which has a place where trading in same selected commodity or commodities is carried on under some fixed rules and regulations and among members only.
The commodity markets may be classified according to the nature of commodities and also according to the nature of their objects.
According to the nature of commodities:
In such a market a number of type of commodities are traded. This is not common.
Only one special commodity is traded in such a market. This is more common type.
Commodity markets can be further classified into:
In such markets agricultural commodities like jute, cotton, wheat, tea, oilseeds etc. are dealt in. In India we have all these types of markets. Some of them are of international character, e.g. tea market in India. Commodity markets dealing in agricultural products are also known as produces exchanges.
There are commodity markets for almost all kinds of important metals like gold (bullion market), silver, copper, iron etc. There are organised markets for manufactured or semi-manufactured goods also like cotton goods, jute goods, wool, hides and skins, sugar etc.
In India there is commodity market for only one kind of manufactured goods, i.e. jute goods. There are wholesale as well as terminal markets for all kinds of commodities but they are not exactly commodity markets because future transactions do not take place in all such markets. On the whole in India there are organised markets for wheat, cotton, jute, jute goods, tea and oilseeds.
According to the nature, of their objects:
Commodity markets may be profit-sharing or non-profit sharing among their members. The leading commodity exchanges are non-profit sharing ones.
2. Characteristics of Commodity Market:
The characteristics of a commodity exchange are:
(1) It is an association of state individuals. There are rules and regulations for membership depending on the constitution of the association.
(2) In an exchange where either one or more than one commodity can be dealt in, though the farmer is more common.
(3) There are same fixed rules and regulations far trading which are determined by the association itself. Those rules permit future trading including speculation.
(4) Transactions can take place only among matters.
(5) It has great similarity with a stock exchange. On the whole a commodity market is a kind of organised market.
3. Functions of Commodity Market:
The commodity exchanges render many useful functions to the business community as a whole and specially to the dealers in the specific commodities.
The functions are:
1. A commodity market provides a definite place where the traders can do their transactions under some standard rules and regulations.
2. The commodity markets far different commodities make the adjustment between the demand for and supply of the respective commodities which is necessary in the interests of industries and trade.
3. The markets provide regular information about the prices of the commodities prevailing in the markets as well as their future trends. This is essential for taking decisions in the business world.
4. In every market there are rules fear transactions as well as rules for membership. All these lead to uniformity in the dealings.
5. In every market there is a separate committee to settle disputes among the members by arbitration.
6. Those carnality markets which deal in commodities of international importance provide opportunities for exportable markets.
4. Services Rendered by Commodity Market:
On account of their useful functions, the commodity markets assume great importance in the economy of a country. They have also international significance.
The services rendered by commodity markets are as follows:
1. To the business community:
The services rendered to the business community as a whole are:
(a) The commodity markets provide regular and continuous markets for different commodities which are generally used as raw materials in different industries or used for general consumption by the people. In the farmer group come jute, cotton, metals etc. and in the latter come tea, wool, sugar etc. The markets become steady and unscrupulous middlemen cannot exploit than.
(b) The burden of risks of irregularities in supplies and violent price fluctuations are shouldered by professional risk-bearer who are the matters of the different markets.
(c) The manufacturers who use the commodities as raw material can make proper planning of production and costing of their products.
(d) Bank advances can be procured more conveniently and there is regularity of production and supply. Banks make advances against stock of raw materials, finished products, etc.
(e) The businessmen engaged in trading in commodity markets are also veil protected by rules and regulations of the markets concerned.
(f) Various helpful speculative transactions like hedging, arbitrage, etc. enable the traders in the markets to take more risks in their dealings.
2. To the society:
(a) The society is benefited in the long run as there is steadiness in the markets of some major commodities, either in the field of trade or industry.
(b) Foreign exchanges can be earned by exports of commodities dealt in commodity markets of international significance.
(c) The producers of agricultural commodities get encouraged because of steady and continuous markets.
5. Types of Transactions in Commodity Markets:
Broadly speaking there are two types of transactions — Cash and Futures. The commodity markets, therefore, have the characteristics of organised markets. In some commodity markets only cash contracts are executed but generally commodity markets are future markets.
The two types of contracts, cash and futures, are detailed below:
(1) Cash contracts:
Under cash contracts there are genuine transactions of buying and selling with full delivery of goods and full payment of price. These are also known as physical contracts as physically the goods are delivered. Every market sets up rules as regards the time within which the delivery has to be completed. Generally the delivery shall be ready within 8 days. The cash contracts are, therefore, also known as ready delivery contracts.
Cash contracts can be further classified into two categories:
(a) Spot contracts:
Under a spot contract the buyer agrees to make payment and the seller agrees to make the delivery immediately or on the spot. It is an executed contract like any other contract of sale. Once the parties agree to such contract they cannot fall back,
(b) Forward contracts:
Under a forward contract neither the payment nor the delivery is required to be made on the spot or immediately. The agreement is made in the spot market but the parties fix up an agreed date when actual execution of the contract will take place. This is the most canton farm of cash contract.
It has to be noted that cash contracts need not be executed inside the ‘exchange hall’ or the premises of the market. A large number of cash contracts are executed outside the companies.
(2) Futures contracts:
These contracts are of speculative nature. There is no need of actual or physical delivery, nor there is need of actual payment. Transactions take place by way of adjustments under the rules and regulations of the market.
The features of futures contracts are:
(1) Such contracts can be entered into among matters only. Outsiders can do such transactions only through matters acting as brokers.
(2) Transactions shall be done on the ‘floor of the exchange or in the ‘ring’.
(3) Each transaction shall be on the basis of one fixed grade called the ‘basic grade’ or ‘contract grade’ as determined by the exchange itself. This is determined according to the condition of supply of the commodity in the market. Once the basis is fixed no mentioning of the grade in the contract is necessary. If the supply of that grade is not available then an alternative or ‘tenderable grade’ may be used.
(4) Not only the grade but the ‘unit’ is also fixed and the matters can do transactions in multiplies of that unit.
(5) Each commodity exchange also fixes some trading months for the commodity in a year. The members have to settle their contracts within the trading months and not according to their choice. Generally the contracts are settled within three or four trading months. Once one of the trading month is chosen, the seller can choose any one day of that month for delivery or settlement.
(6) Transactions have to be done according to the rules and regulations of the market. If there is any dispute, it is settled by arbitration and for that there is a special sub-committee in the exchange.
(7) Every member has to deposit a certain percentage of each contract with the authorities of the exchange as margin deposit. The percentage is fixed by the authorities of the exchange. This is to guard against defaults made by matters as the transactions are generally based on oral commitments.
Thus it is to be observed that there is a great difference between forward contracts and futures contracts.
The main points of difference are:
(a) Forward contracts are more common and less restrictive than futures contracts. Futures contracts must be carried out among matters on the floor of the exchange,
(b) Under forward contracts ultimately delivery has to be made though the date of settlement may be postponed but under futures contracts there may not be any physical delivery of goods,
(c) Forward contracts are meant for genuine transactions while futures contracts are speculative in character.