You as a trader should determine
your limits for profit and loss. A dealer should keep
limits for the amount and quantity of commodities; both
sold and bought.
If the Futures prices for two months
are close to the day-to-day price, it is the best time
to buy.If the profit is sure to exceed even one rupee
per kilo, sell. If there is a constant loss, do away
with the deal even if it is in loss, without waiting
much. You can regain the loss later by selling or buying.
A trader who can make the right
decisions would make more profit from the Futures market
than he would perhaps make from the stock market or
real estate deals. While stock market demands at least
50% of the whole value, dealer needs to spend only 6-15
percent as margin money in Futures Market.
If the trader’s judgment is good,
he can make more money faster because prices tend to
change more quickly than real estate or stock prices.
On the other hand, bad trading judgment can ruin you.
Futures are highly leveraged investments.
The trader puts up a small fraction of the value of
the underlying contract (usually 10 percent of less)
as margin. The actual value of the contract is only
exchanged on those rare occasions when delivery takes
place. Moreover the commodities futures investor is
not charged interest on the difference between the margin
and the full contract value.
Most commodities markets are very
broad and liquid. Transactions can be completed quickly,
lowering the risk of adverse market moves between the
time of the decision to trade and the trade’s execution.
There is no clear demarcation regarding
the deals. Practically anyone can do any kind of dealings.
However, one should take intelligent decisions by evaluating
the ups and downs of commodities in the spot market.
Normally, as the term period increases Futures value
may increase. But this need not happen at all times.
As the period decreases the difference in the price
in the spot market will decrease too. On the 15th of
every month, the ready market price and Futures price
should be the same.
There are two basic categories of
futures participants--hedgers and speculators.
In general, hedgers use futures
for protection against adverse future price movements
in the underlying cash commodities. The rationale of
hedging is based upon the demonstrated tendency of cash
prices and futures values to move in tandem.
Hedgers are very often business
houses, exporters, traders, farmers or individuals,
who at one point or another deal in the underlying cash
Take, for instance, a major food
processor, who trade in pepper. If pepper prices go
up he must pay the farmer or pepper dealer more. For
protection against higher pepper prices, the processor
can “hedge” his risk exposure by buying enough pepper
futures contracts to cover the amount of pepper he expects
to buy. Since cash and futures prices do tend to move
in tandem, the futures position will profit if peppers
prices rise enough to offset cash pepper losses.
Speculators are independent traders
and investors. Independent traders, also called “locals”
trade for their own accounts. For speculators, futures
have important advantages over other investments, as
we have explained elsewhere.
are many ways to trade in the futures market
One way is to calculate the approximate
production of a commodities and sell it in the commodities
market, which will be harvested many months later. The
farthest month possible form harvesting would be the
Assume that the best possibility
to get best price is in the farthest month and fix the
deal. When the period ends you can bring the goods to
the Warehouse, receive the receipt, give it to the dealer
and finish the deal.
Now think of a situation that you
sold the commodities on the Futures market when you
were actually holding it. That is, you sold 2
tonnes of rubber you had, in the Futures market. Then
you find the price going down in the Futures market.
You can wait for the whole period and can buy back as
much rubber as you had sold. This process is called
squaring. In addition to the profit in the Futures market
you can sell it in the ready market for whichever amount
you receive and can gain that profit too.
The next method is that the farmers
themselves can do the speculation. Sell the commodities,
which is with you in the ready market. You will get
ready cash. Then invest some of this amount in the Futures
market if the price is rising there. Then you can sell
this when the price is high to gain profit.
Another method is similar to this.
The farmer sells his commodities in the ready market
and gets ready cash and in the same month he buys goods
from the Futures market on the day on which the deal
ends (15th). Since it is bought on that day’s Futures,
there is no time to square and finish the deal. The
goods have to be bought by giving the full price itself.
When you spend this money you will get the warehouse
receipt. There is three months’ time to take the
goods out of the warehouse. Let the goods remain there.
The warehouse receipt is valid for three months. You
can pledge this legal document or can keep it as a deposit
Another method is selling
the goods for three months Futures by using the receipt.
Since the goods are in the warehouse (warehouse receipt
is your proof) you don’t have to spend the margin money.
When the term ends, you can bring the receipt to the
member organization and finish the deal.