Knowledge Centre

  • Knowledge is power
  • Information is liberating
  • Education is the premise of progress, in every society
Commodities | August 24, 2020

What are commodity futures?

A cotton farmer is expecting to produce a good quantity this season and is looking for the buyer. Company A is the leading textile industry and a potential customer for the cotton farmer. Here, Company A can use commodity futures to lock in a price for buying cotton at a date in the near future. Like other commodities, the price of cotton can fluctuate considerably. To reduce the risk of cost increase by the farmer, Company A locks in the price. Similarly, the farmer also hedges his position and mitigates the risk of cost decrease.

Commodity futures

Contracts are the type of standardized derivative contract between two parties that agrees to buy and sell the underlying asset. This deal specifies the date in the future and the price at which this will eventually close.

The mechanism works in a simpler manner. Considering the example taken above, if the cotton price increases in the future date, Company A makes a profit. They will get the cotton at the low and agreed-upon price and can sell the same at the current higher market price.

However, if the price decreases, the cotton farmer will make money by selling the cotton at the specified higher than market rates.In India, commodity futures are traded on exchanges like Multi-Commodity Exchange (MCE) and National Commodity and Derivatives Exchange (NCDEX).

What are some of the advantages?

The commodity futures not only help the speculative traders in making money but they are also a big part of the importer/exporter trades and producer of any commodity.

  1. Leverage Value addition: In future trading, you are exposed to a much bigger position only by paying a fraction as margin. Also, the margin, in this case, is lower than equity or index futures.
  2. Diversification: For a rookie investor, it’s always advised not to put all their eggs in one basket. As proven historically, there is a low correlation between commodity and equity markets. Hence, it can turn out to be an excellent way of diversification in one’s portfolio.
  3. Transparency: As compared to forward contracts which are customizable over-the-counter traded contracts, they are traded on the exchange. Because of this, the price discovery mechanism is independent of buyer/seller intervention negating market manipulation.
  4. Hedging Instrument: You can easily hedge your portfolio against inflation with the help of commodities as they are closely associated with inflation.
  5. Controlling cost: As an industrialist, you always look for affordable raw material costs. This can be achieved by locking in the prices months before.

What are some of the disadvantages?

Despite the several advantages prescribed above, trading in the futures commodity is not everybody’s cup of tea. It involves an enormous amount of risk which often takes the shape of fear and rule out the retail players from the game forever. Some of the disadvantages to note are the following:

  • High Leverage: Leverage is a two-edged sword that can either help in making you enormous profits or can disrupt everything. Lower margin with high exposure can lead to poor money management which can in turn lead to unnecessary risk-taking.
  • Risk of physical delivery: In India, most of the commodity futures are settled in cash only but there still exists a high possibility of actual physical delivery of products like soya, oil, gold, etc.
  • With the highly risky nature of this product, it is recommended to be traded only by the professionals and veteran traders.
  • Highly volatile: These contracts are fluctuating in nature and is influenced by events from around the world.

Commodity Form

Related Blogs

Frequently Asked Questions


Important Message The information contained in this file is provided for informational purposes only, and should not be construed as legal advice on any matter. The content and interpretation of the law addressed herein is subject to revision. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this file to the fullest extent permitted by law. Every effort is made to avoid errors. In spite of that, errors and discrepancies may creep in. It is expressly stated that neither Findoc Investmart Private Limited nor any of the contributors of updates will be responsible for any damage to anybody on the basis of this document. Readers are, therefore, requested to cross check with the original sources e.g. Government publications, Orders, Judgments etc., before taking any action or making any decision. These services are being provided through our group companies Findoc Capital Mart Pvt Ltd and Findoc Finvest Private Limited

Attention Investors
  • 1. Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.
  • 2. Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.
  • 3. Pay 20% upfront margin of the transaction value to trade in cash market segment.
  • 4. Check your securities / MF / bonds in the consolidated account statement issued by NSDL/CDSL every month.
  • 5.Investments in securities market are subject to market risks, read all the related documents carefully before investing.
  • 6.The securities are quoted as an example and not as a recommendation.
No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries forrefund as the money remains in investors account.
Prevent Unauthorized Transactions in your demat account --> Update your Mobile Number with your Depository Participant. Receive alerts on your Registered Mobile for all debit and other important transactions in your demat account directly from NSDLon thesame day.....issued in the interest of investors.
KYC is a one-time exercise while dealing in securities markets-once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary. | (As instructed by SEBI, We hereby declare that we do engage in proprietary trading in all segment across the exchange.)
Effective communication & Speedy redressal of the grievances a. Register on SCORES portal b. Mandatory details for filing complaints on SCORES: i. Name, PAN, Address, Mobile Number, Email ID c. Benefits: i. Effective communication ii. Speedy redressal of the grievances link:
In case of grievances for any of the services rendered by Findoc Investmart Pvt Ltd write an email to
Mandatory updation of certain attributes of KYC of clients - The advisory is also displayed on the Depository website at following link:
1. NSDL:IN-DP-469-2020 2. Findoc Finvest Pvt. LTD. CIN no:U65910CH1995PTC016409 RBI REGISTRATION NO. B-06.00267 3. Findoc Investmart Private Limited CIN no:U74992CH2010PTC035180 SEBI REGISTRATION NO. INZ000164436 4. Findoc Investmart IFSC PVT. LTD CIN no: U65999GJ2017PTC095984 SEBI REGISTRATION NO. INZ000200735 5. INVESTMENT ADVISOR SEBI Registration no. INA100012297

Member I'd | Nse- 14697 | BSE- 6529 | MCX- 55205 | NCDEX- 01152


Registered Office :

1210/1211/1212/1213,1213A, Exchange Plaza, Near Mercury Hotel, Opp. WTC Tower, Gift City, Gandhi Nagar- 382355, Gujarat, India

Corporate Office :

4th Floor, Kartar Bhawan, Near PAU Gate No.1, Ferozepur Road Ludhiana -141001.

Copyright © 2024 FINDOC INVESTMART PVT. LTD. All Rights Reserved.

Developed & Content Powered by Accord Fintech Pvt. Ltd.

Open a Demat Account