Commodities are more than what you think they are. Almost everything you see around is made of what market considers commodity. A commodity could be an article, a product or material that is bought and sold. It could be any kind of movable property, except actionable claims, money and securities. Commodity trade forms the backbone of world economy.
The Indian commodity market is estimated to be around Rs. 11 million, and forms almost 50 percent of the Indian GDP. It deals with agricultural commodities such as rice, wheat, groundnut, tea, coffee, jute, rubber, spices and cotton. Besides precious metals such gold and silver, the commodity market also deals with base metals like iron and aluminum and energy commodities such as crude oil and coal. The list is long.
What do the commodity brokers do? They simply facilitate the business of buyers and sellers, for a legalized rate of commission.
Futures Market, Beneficial Market
Humans, ever since they began farming, searched for ways to face the vagaries of weather. With the arrival of market systems, their challenge increased. They now needed to ensure just price for their product.
Indian farming, faced with droughts, floods and natural calamities, has always been a bet on the nature. When farmer wins the bet and come to market, the supply is more than the actual demand. That pushes the price down, shattering the farmer. Futures trading should be seen as an idea originated from framers search to face the challenges of unpredictable weather and fluctuating market prices.
It must have originated from the execution of a prior to harvest agreement made between the farmer (who promises to sell the harvest at a definite price) and one who needs the grain (who agrees to buy it at that price.)
As some 70 percent of Indians depend on farming, directly and indirectly, the futures trading, should be also seen as important nation building process. It unquestionably helps farmer to get right price and helps him escape the traps of middlemen.
The ancient system of oral agreement between farmer and buyer, which the prototype of Future Trading, gradually became contracts. Later, the buyer began to make some advance payment for the surety of the contracts. When contracts became a normal practice, they were assigned the value of the commodities themselves. Also, these contracts began to be sold and bought just as the commodities.
For example, let us suppose that a person got into a contract with a farmer to buy a particular grain. What if he does not need that grain any more? He could sell the contract to someone who needs the grain!
But how does it help the farmer? Okay. Take the case of a farmer who made a contract but doesnt want to sell his grain now. He can assign the contract to some other farmer who is ready to sell.
Think again. There is a lot of gap between the time of making the initial contract and selling the product. Due to various reasons such as weather, demand-supply mechanism of the market and political policy changes, the price of the product could vary when it is ready for selling. Either of the contract parties can be in regrettable situation.
It is this situation that attracted people, who dont have own commodity to sell or who dont really need to buy, into Futures Market. The practice of buying Futures Contracts for less price and selling them at higher price has became a part of Futures Market.
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