Financial market

Financial markets are a mechanism enabling participants to deal in financial claims. The markets also provide a facility in which their demands and requirements interact to set a price for such claim. The main organized financial market in India is the money market and the capital market. The first is a market for short-term securities while the second one is a longer securities, i.e., securities having a maturity period of one year or more. With all these elements in the India Financial market happens to be one of the oldest across the globe and is definitely the fastest growing and best among all the financial markets of the emerging economies. The history of Indian capital markets spans back 200 years, around the end of the 18th century. It was at this time that India was under the rule of the East India Company. The capital market of India initially developed around Mumbai; with around 200 to 250 securities brokers participating in active trade during the second half of the 19th century. In economics, a financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a nonmarket economy such as a gift economy. Financial markets facilitate:

The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) International trade (in the currency markets)

and are used to match those who want capital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. In mathematical finance, the concept of a financial market is defined in terms of a continuous-time Brownian motion stochastic process. Definitions of Financial market: In economics, a financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction cost. A market for a financial instrument, in which buyers and sellers find each other and create or exchange financial assets.

the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE) or an electronic system (like NASDAQ). Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are outside an exchange, while any two companies or people, for whatever reason, may agree to sell stock from the one to the other without using an exchange. Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Financial markets can be domestic or they can be international.

STRUCTURE OF FINANCIAL MARKETS IN INDIA The financial markets can be divided into different subtypes:

Capital markets which consist of: o Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. o Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities. IMPORTANCE OF FINANCIAL MARKET IN INDIA RAISING THE CAPITAL: Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold.

The following table illustrates where financial markets fit in the relationship between lenders and borrowers: Relationship between lenders and borrowers Lenders Financial Intermediaries Financial Markets Borrowers

Interbank Individuals Banks Stock Exchange Companies Individuals Insurance Companies Money Market Central Government Companies Pension Funds Bond Market Municipalities Mutual Funds Foreign Exchange Public Corporations Derivative products During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products, or derivatives for short. In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit risk. It is also called financial economics. Currency markets Seemingly, the most obvious buyers and sellers of currency are importers and exporters of goods. While this may have been true in the distant past, [when?] when international trade created the demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to the Bank for International Settlements.[1] The picture of foreign currency transactions today shows:

Banks/Institutions Speculators Government spending (for example, military bases abroad) Importers/Exporters Tourists

Analysis of financial markets Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are now called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not correlated to the last change. The scale of changes in price over some unit of time is called the volatility. It was discovered by Benot Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lvy stable distributions. The scale of change, or volatility, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an estimated standard deviation. A new area of concern is the proper analysis of international market effects. As connected as today's global financial markets are, it is important to realize that there are both benefits and consequences to a global financial network. As new opportunities appear due to integration, so do the possibilities of contagion. This presents unique issues when attempting to analyze markets, as a problem can ripple through the entire connected global network very quickly. For example, a bank failure in one country can spread quickly to others, which makes proper analysis more difficult.

Growth of financial market in india India market growth has experienced good times in the recent years which have prospered the economy of the country to a great extent. Since the liberalization of the market since the 1990s, there has been a high growth in the market and various industrial sectors. The positive market growth has also improved the overall standard of living of the people in the country.

Over the recent years, there has been a considerable growth in Indian market which has led to high Gross Domestic Product (GDP) with an average annual growth of around 6 to 7%. In the financial year 2008-09, the factor cost of the GDP was around 6.7 %. To keep up this favourable growth, the government is also taking steps. The present Indian Prime Minister, Dr Manmohan Singh, has stressed that the government is taking various steps to make the yearly economic growth go up to 9 %. In fact, the World Bank too has projected that the market growth rate of India will reach around 8 % in the year 2010 which may even overtake china. . There are a number of factors that have paved path for India market growth. After the economic liberalization policies were undertaken in the 1990s, the economy of the country has been steadily rising which has led to more demands and supply circles. This has introduced diverse market sectors and industries in the country which have led to a competitive consumer market. Today, India ranks among the 12th largest economy in the world in terms of market exchange while it is the 4th largest economy in terms of the purchasing power parity. Foreign investment markets in India Due to high demand of different product and the perfect competition market, more and more foreign companies are investing and entering the Indian market. According to recent reports, the amount of the foreign institutional investments (FIIs) has touched around US$ 10 billion. This is a real boost to the market as well as the stock exchange of India. There was around an 85.1 % growth in the Foreign direct investments (FDI) market which rose from around US$ 25.1 billion in the year 2007 to US$ 46.5 billion in the year 2008. In fact the Indian equity market has become the third largest in the South East Asia.

CAPITAL MARKET
Capital Market is the market from where individuals, companies and govt. can long term financing by engaging in buying and selling of securities. The participants of capital market are mainly those who have a surplus of funds and those who have a deficit of funds. The persons having surplus money want to invest in capital market in hope of getting high returns on their investment. On the other hand, people with fund deficit try to get financing

from the capital market by selling stocks and bonds. These two kinds of activities keep the capital market going. Capital Market is characterized as the provider of long-term financing. The instruments used for this long-term financing are equity instruments, insurance instruments, derivative instruments and especially bonds. Capital Market is one of the significant aspect of every financial market. Hence it is necessary to study its correct meaning. Broadly speaking the capital market is a market for financial assets which have a long or indefinite maturity. Unlike money market instruments the capital market intruments become mature for the period above one year. It is an institutional arrangement to borrow and lend money for a longer period of time. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. These institutions play the role of lenders in the capital market. Business units and corporate are the borrowers in the capital market. Capital market involves various instruments which can be used for financial transactions. Capital market provides long term debt and equity finance for the government and the corporate sector. Capital market institutions provide rupee loans, foreign exchange loans, consultancy services and underwriting. Capital Market is the market from where individuals, companies and govt. can long term financing by engaging in buying and selling of securities.

Significance, Role & Functions of Capital Market

Like the money market capital market is also very important. It plays a significant role in the national economy. A developed, dynamic and vibrant capital market can immensely contribute for speedy economic growth and development. Let us get acquainted with the important functions and role of the capital market. Mobilization of Savings : Capital market is an important source for mobilizing idle savings from the economy. It mobilizes funds from people for further investments in the productive channels of an economy. In that sense it activate the ideal monetary resources and puts them in proper investments.

Capital Formation : Capital market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. Through mobilization of ideal resources it generates savings; the mobilized savings are made available to various segments such as agriculture, industry, etc. This helps in increasing capital formation. Provision of Investment Avenue : Capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, units of mutual funds, insurance policies, etc. definitely provides diverse investment avenue for the public. Speed up Economic Growth and Development : Capital market enhances production and productivity in the national economy. As it makes funds available for long period of time, the financial requirements of business houses are met by the capital market. It helps in research and development. This helps in, increasing production and productivity in economy by generation of employment and development of infrastructure. Proper Regulation of Funds : Capital markets not only helps in fund mobilization, but it also helps in proper allocation of these resources. It can have regulation over the resources so that it can direct funds in a qualitative manner. Service Provision : As an important financial set up capital market provides various types of services. It includes long term and medium term loans to industry, underwriting services, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum. Continuous Availability of Funds : Capital market is place where the investment avenue is continuously available for long term investment. This is a liquid market as it makes fund available on continues basis. Both buyers and seller can easily buy and sell securities as they are continuously available. Basically capital market transactions are related to the stock exchanges. Thus marketability in the capital market becomes easy. These are the important functions of the capital market.

TYPES OF CAPITAL MARKET The items traded on it are investment funds or loans with different maturity dates. . Using the criterion of the type of transactions made between participants, Capital market can be classified into primary and secondary markets. The primary market is a market for new shares, where as in the secondary market the existing securities are traded.

PRIMARY MARKET
The primary market consists of the issuer and the first buyers of the issue. All subsequent trading takes place on the secondary market. Underwriting is the process by which the primary market functions, that is, how issues are sold to the primary buyers. The primary market can at times be more volatile than the secondary market because it is difficult to determine the underlying value of new issues. In any case, the primary market accounts for only a portion of trade on a given trading day. See also: Rights issue, Preferential issue, Initial public offering. The primary market is that part of the capital markets that deals with the issue of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets creates long term instruments through which corporate entities borrow from capital market.

Definition of Primary market :

The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers.

Role of the Primary Market

The primary market provides the channel for sale of new securities. Primary market provides pportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the ecurities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.

Features of Primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." The financial assets sold can only be redeemed by the original holder.

The primary market is the kind of capital market, where surplus funds are invested in money units, and it follows the first sale of newly issued securities by authorized operators on it. One of the factors influencing the possibility of investing in this market is the tendency to save. The larger the investors conviction that the placement of their funds on the primary market is better than in the bank, the more likely it is that this investment will take place. . For businesses, selling their issued securities on the primary market represents an opportunity to obtain funds to finance its activities. In effect, the primary market offers opportunities of supplying funds to a business. The players in this market can be both corporations and individuals with a surplus of funds, who are interested in the purchase of issued securities.

To examine the profitability of a proposed issuance of securities on the primary market, it is recommended that the enterprise take the following actions:

Get information about the possibility of obtaining a bank loan, and possibly also its cost Obtain information about the possible emission price (which may be fixed or variable) Obtain information about possible returns from such an emission Obtain information about the cost of a given emission.

Different kinds of issues

Primarily, issues can be classified as a Public, Rights or Preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below: Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities. A follow on public offering (Further Issue) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. A Preferential issue is an issue of shares or of convertible securities by the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc.

Benefits and drawbacks of investing in primary market

investing in primary market has its own benefits and drawbacks.some of the key benefits are: it is safer to invest in the primary market than in secondry market as the scope ofor manupulation of price is smaller. the investor does not have to pay any kind of brokerage or transcation fee or any tax such as service tax, stamp duty and stt. no need to time the market as all investors will get the shares at the same price some of the major drawbacks are as follows in case of over subscription, the shares are alloted in proportion basis thus, small investor hardly get any allotment in such a case. money is locked for a long time and the shares are alloted after a few days where as in case of purchase from the secondry market the shares are credited within three working days.

SECONDRY MARKET
The secondary market is a market in which existing securities are resold or traded. This market is also known as the stock market. In India the secondary market consists of recognized stock exchanges operating under rules, by-laws and regulations duly approved by the government. These stock exchange constitute an organized market where securities issued by the central and state government, public bodies, and joint stock companies are traded Stock exchanges are primarily responsible for mobilizing and channelizing savings of the household sector into productive enterprises. Definition of Stock Exchanges. The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as "an association, organization or body of individuals, whether incorporate or not, established for the purpose of assisting, regulating

and controlling the business in buying, selling and dealing in securities".

Characteristics
it is a place where securities are purchased and sold. a stock exchange is an associated of persons whether incorporated or not. the trading in a stock exchange is strictly regulated and rules and regulations prescribed for various transactions. both genuine investors and speculators buy and sell shares.

Functions of a Stock Exchanges

The role of a stock exchange in a capital market is as follows:(1) Ready and Continuous Market: The stock exchange provides a ready and continuous market for the sale and purchase of securities. (2) Bank Borrowing Facility: Securities listed on a stock exchange serve as a collateral security when an investor need funds from a bank. (3) Promotes Capital Formation: Stock Exchanges promotes capital formation as they encourage investors to invest need funds from a bank. (4) Safety and Fair Dealing: The Stock Exchange operates under rules and regulations framed by the Central Government. The rules and regulations framed by the Central Government are in the interest to ensure safety to the

investors and whatever be their dealings, it should a fair one. (5) Government Funding: Stock Exchanges helps the government to raise funds by selling shares and debentures. (6) Creation of Employment Opportunities: Stock Exchange creates a number of employment opportunities to a number of brokers, sub brokers as they are the intermediaries through which shares are being sold. (7) Evaluation of Securities: Stock Exchanges helps to evaluate the worth of securities, as securities are traded at a certain price on the stock market. Investors are able to determine the real worth of their holdings in the form of shares and debentures which are listed on the stock exchange. (8) Industrial Development: The capital collected through shares and debentures can be put to industrial use. With the capital, new industries can be started, existing ones can be expanded and modernized and thereby enhancing the industrial development of a country. (9) Clearing House of Securities: The Stock Exchanges acts as a clearing house of securities. It facilitates easy and quick clearance of transactions of securities between the buyers and the sellers. (10) Facilitates Flow of Capital: Stock Exchange facilitate the flow of capital to companies who have a high potential to raise substantial funds.

Mechanism of dealing in stock exchanges Buying and selling

To invest in a company by buying shares, you need to find a broker. A broker is the only person that can make an order to buy or sell stocks. There are two types of brokers that every brokerage firm has. The first type of broker is a stockbroker, who researches investments, helps make goals, and give advice on investing. Discount brokers on the other hand, do not offer advice, and they do no research. They just are middle men in the transactions. When you give a stockbroker your order, they relay the order to the floorbrokers. The floorbrokers do all the actual buying and selling, and they hold a seat on the exchange.

After you find a broker and buy the stocks, the broker does the rest of the work. You just have to call him up and place an order with him. The most basic order is the market order, where you just ask the broker to buy or sell your stocks at the best price he can get his hands on. Another type of order which takes more research and predicting on your part is a limit order. In a limit order, you tell the broker to trade only when the stock is at a certain price or better. A stop order is an order which can save you from extreme loss. In a stop order, you tell the broker to sell your shares if the stock drops too low, and you tell him the price not to let it drop below.

Stock exchange indices

An Index is used to give information about the price movements of products in the financial, commodities or any other markets. Financial indexes are constructed to measure price movements of stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to capture the overall behaviour of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value.Stock market indexes are useful for a variety of reasons. Some of them are : They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt. They can be used as a standard against which to compare the performance of an equity fund. It is a lead indicator of the performance of the overall economy or a sector of the economy Stock indexes reflect highly up to date information Modern financial applications such as Index Funds, Index Futures, Index Options play an important role in financial investments and risk management Stock market indices in India: There are two major stock market Indices in India S&P CNX Nifty

BSE Sensex

Major stock exchanges in India

BSE

A very common name for all traders in the stockmarket, BSE, stands for Bombay Stock Exchange. The oldest market not only in the country, but also in Asia. In the early days, BSE was known as "The Native Share & Stock Brokers Association." It was established in the year 1875 and became the first stock exchange in the country to be recognised by the government. In 1956, BSE obtained a permanent recognition from the Government of India under the Securities Contracts (Regulation) Act, 1956. In the past and even now, it plays a pivotal role in the development of the country's capital market. This is recognised worldwide and its index, SENSEX, is also tracked worldwide. Earlier it was an Association of Persons (AOP), but now it is a demutualised and corporatised entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).
NSE

The National Stock Exchange of India (NSE) was incorporated in November 1992 as a tax-paying company. It is recognised under Securities Contracts (Regulation) Act, 1956 in 1993 as a stock exchange. In June 1994, it commenced operations in the Wholesale Debt Market (WDM). In November, the same year, the Capital Market (Equities) segment commenced operations and the Derivatives segment in June 2000. Regional stock exchange Here are 23 stock exchanges in India. Among them two are national level

stock exchanges namely Bombay Stock Exchang (BSE) and National Stock Exchange of India (NSE). The rest 21 are Regional Stock Exchanges (RSE). List of Regional Stock Exchanges in India Ahmedabad Bangalore Bhubaneshwar Calcutta Cochin Coimbatore Delhi Guwahati Jaipur Ludhiana Madhya Pradesh Madras Magadh Mangalore Meerut OTC Exchange Of India Pune Saurashtra Kutch UttarPradesh Vadodara

COMMODITY MARKET
Commodity markets are markets where raw or primary products are traded. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. This article focuses on the history and current debates regarding global commodity markets. It covers physical product (food, metals, electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. Articles on reinsurance markets, stock markets, bond markets and currency

markets cover those concerns separately and in more depth. One focus of this article is the relationship between simple commodity money and the more complex instruments offered in the commodity markets.

History
The modern commodity markets have their roots in the trading of agricultural products. While wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States, other basic foodstuffs such as soybeans were only added quite recently in most markets. For a commodity market to be established, there must be very broad consensus on the variations in the product that make it acceptable for one purpose or another. The economic impact of the development of commodity markets is hard to overestimate. Through the 19th century "the exchanges became effective spokesmen for, and innovators of, improvements in transportation, warehousing, and financing, which paved the way to expanded interstate and international trade."

Early history of commodity markets

Historically, dating from ancient Sumerian use of sheep or goats, other peoples using pigs, rare seashells, or other items as commodity money, people have sought ways to standardize and trade contracts in the delivery of such items, to render trade itself more smooth and predictable. Commodity money and commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money - more than an I.O.U. but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery this made them like a modern futures contract. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting. However, the commodity status of living things is always subject to doubt - it was hard to validate the health or existence of sheep or goats. Excuses for non-delivery were not unknown, and there are recovered Sumerian letters that complain of sickly goats, sheep that had already been fleeced, etc. If a seller's reputation was good, individual backers or bankers could decide to take the risk of clearing a trade. The observation that trust is always required between market

participants later led to credit money. But until relatively modern times, communication and credit were primitive. Classical civilizations built complex global markets trading gold or silver for spices, cloth, wood and weapons, most of which had standards of quality and timeliness. Considering the many hazards of climate, piracy, theft and abuse of military fiat by rulers of kingdoms along the trade routes, it was a major focus of these civilizations to keep markets open and trading in these scarce commodities. Reputation and clearing became central concerns, and the states which could handle them most effectively became very powerful empires, trusted by many peoples to manage and mediate trade and commerce.

Mechanism of dealing at commodity exchanges

There are two kinds of trades in commodities. The first is the spot trade, in which one pays cash and carries away the goods. The second is futures trade. The underpinning for futures is the warehouse receipt. A person deposits certain amount of say, good X in a ware house and gets a warehouse receipt. Which allows him to ask for physical delivery of the good from the warehouse. But some one trading in commodity futures need not necessarily posses such a receipt to strike a deal. A person can buy or sale a commodity future on an exchange based on his expectation of where the price will go. Futures have something called an expiry date, by when the buyer or seller either closes (square off) his account or give/take delivery of the commodity. The broker maintains an account of all dealing parties in which the daily profit or loss due to changes in the futures price is recorded. Squiring off is done by taking an opposite contract so that the net outstanding is nil. For commodity futures to work, the seller should be able to deposit the commodity at warehouse nearest to him and collect the warehouse receipt. The buyer should be able to take physical delivery at a location of his choice on presenting the warehouse receipt. But at present in India very few warehouses provide delivery for specific commodities. Following diagram gives a fair idea about working of the Commodity market.

Today Commodity trading system is fully computerized. Traders need not visit a commodity market to speculate. With online commodity trading they could sit in the confines of their home or office and call the shots. The commodity trading system consists of certain prescribed steps or stages as follows: I. Trading: - At this stage the following is the system implemented- Order receiving - Execution - Matching - Reporting - Surveillance - Price limits - Position limits II. Clearing: - This stage has following system in place- Matching - Registration - Clearing - Clearing limits - Notation - Margining - Price limits - Position limits - Clearing house. III. Settlement: - This stage has following system followed as follows- Marking to market - Receipts and payments - Reporting - Delivery upon expiration or maturity.

Major commodity exchanges in India and commodites traded .

National Commodities & Derivatives Exchange Limited (NCDEX) National Commodities & Derivatives Exchange Limited (NCDEX) promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank of Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSC). Punjab National Bank (PNB), Credit Ratting Information Service of India Limited (CRISIL), Indian Farmers Fertilizer Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by subscribing to the equity shares have joined the promoters as a share holder of exchange. NCDEX is the only Commodity Exchange in the country promoted by national level institutions. NCDEX is a public limited company incorporated on 23 April 2003. NCDEX is a national level technology driven on line Commodity Exchange with an independent Board of Directors and professionals not having any vested interest in Commodity Markets. It is committed to provide a world class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Markets Commission (FMC). NCDEX is also subjected to the various laws of land like the Companies Act, Stamp Act, Contracts Act, Forward Contracts Regulation Act and various other legislations. NCDEX is located in Mumbai and offers facilities to its members in more than 550 centers through out India. NCDEX currently facilitates trading of 57 commodities.

Commodities Traded at NCDEX: Bullion:Gold KG, Silver, Brent Minerals:Electrolytic Copper Cathode, Aluminum Ingot, Nickel Cathode, Zinc Metal Ingot, Mild steel Ingots Oil and Oil seeds:Cotton seed, Oil cake, Crude Palm Oil, Groundnut (in shell), Groundnut expeller Oil, Cotton, Mentha oil, RBD Pamolein, RM seed oil cake, Refined soya oil, Rape seeds, Mustard seeds, Caster seed, Yellow soybean, Meal Pulses:Urad, Yellow peas, Chana, Tur, Masoor, Grain:-

Wheat, Indian Pusa Basmati Rice, Indian parboiled Rice (IR36/IR-64), Indian raw Rice (ParmalPR-106), Barley, Yellow red maize Spices:Jeera, Turmeric, Pepper Plantation:Cashew, Coffee Arabica, Coffee Robusta Fibers and other:Guar Gum, Guar seeds, Guar, Jute sacking bags, Indian 28 mm cotton, Indian 31mm cotton, Lemon, Grain Bold, Medium Staple, Mulberry, Green Cottons, , , Potato, Raw Jute, Mulberry raw Silk, V-797 Kapas, Sugar, Chilli LCA334 Energy:Crude Oil, Furnace oil

Multi Commodity Exchange of India Limited (MCX) Multi Commodity Exchange of India Limited (MCX) is an independent and de-mutulized exchange with permanent reorganization from Government of India, having Head Quarter in Mumbai. Key share holders of MCX are Financial Technologies (India) Limited, State Bank of India, Union Bank of India, Corporation Bank of India, Bank of India and Cnnara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures market across the country. MCX started of trade in Nov 2003 and has built strategic alliance with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors Association of India, pulses Importers Association and Shetkari Sanghatana. MCX deals wit about 100 commodities. Commodities Traded at MCX: Bullion:Gold, Silver, Silver Coins, Minerals:Aluminum, Copper, Nickel, Iron/steel, Tin, Zinc, Lead Oil and Oil seeds:Castor oil/castor seeds, Crude Palm oil/ RBD Pamolein, Groundnut oil, Mustard/ Rapeseed oil, Soy seeds/Soy meal/Refined Soy Oil, Coconut Oil Cake, Copra, Sunflower oil, Sunflower Oil cake, Tamarind seed oil, Pulses:Chana, Masur, Tur, Urad, Yellow peas Grains:Rice/ Basmati Rice, Wheat, Maize, Bajara, Barley,

Spices:Pepper, Red Chili, Jeera, Cardamom, Cinnamon, Clove, Ginger, Plantation:Cashew Kernel, Rubber, Areca nut, Betel nuts, Coconut, Coffee, Fiber and others:Kapas, Kapas Khalli, Cotton (long staple, medium staple, short staple), Cotton Cloth, Cotton Yarn, Gaur seed and Guargum, Gur and Sugar, Khandsari, Mentha Oil, Potato, Art Silk Yarn, Chara or Berseem, Raw Jute, Jute Goods, Jute Sacking, Petrochemicals:High Density Polyethylene (HDPE), Polypropylene (PP), Poly Vinyl Chloride (PVC) Energy:Brent Crude Oil, Crude Oil, Furnace Oil, Middle East Sour Crude Oil, Natural Gas

National Multi Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualised Electronic Multi Commodity Exchange in India. On 25th July 2001 it was granted approval by Government to organize trading in edible oil complex. It is being supported by Central warehousing Corporation Limited, Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got reorganization in Oct 2002. NMCEIL Head Quarter is at Ahmedabad.

Recent Trends in Commodities

The 2008 global boom in commodity prices - for everything from coal to corn was fueled by heated demand from the likes of China and India, plus unbridled speculation in forward markets. That bubble popped in the closing months of 2008 across the board. As a result, farmers are expected to face a sharp drop in crop prices, after years of record revenue. Other commodities, such as steel, are also expected to tumble due to lower demand. This will be a rare positive for manufacturing industries, which will experience a drop in some input costs, partly offsetting the decline in downstream demand. [2]

Returns

Studies show that fully-collateralized commodity futures have historically offered the same return and Sharpe ratio as equities. Commodities have an approximate expected return of 5% in real terms which is based on the risk premium for 116 different commodities weighted equally since 1888 (Source Report 219171-Wharton Business School). Investment professionals often too mistakenly claim there is no risk premium in commodites.

Spot trading
Spot trading is any transaction where delivery either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints. Spot trading normally involves visual inspection of the commodity or a sample of the commodity, and is carried out in markets such as wholesale markets. Commodity markets, on the other hand, require the existence of agreed standards so that trades can be made without visual inspection.

Forward contracts
A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today. The fixed price today is known as the forward price.

Futures contracts
A futures contract has the same general features as a forward contract but is transacted through a futures exchange. Commodity and futures contracts are based on whats termed forward contracts. Early on these forward contracts agreements to buy now, pay and deliver later were used as a way of getting products from producer to the consumer. These typically were only for food and agricultural products. Forward contracts have evolved and have been standardized into what we know today as futures contracts. Although more complex today, early forward contracts for example, were used for rice in seventeenth century Japan. Modern forward, or futures agreements, began in Chicago in the 1840s, with the appearance of the railroads. Chicago, being centrally located, emerged as the hub between Midwestern farmers and producers and the east coast consumer population centers. In essence, a futures contract is a standardized forward contract in which the buyer and the seller accept the terms in regards to product, grade, quantity and location and are only free to negotiate the prices.

Hedging
Hedging, a common (and sometimes mandatory) practice of farming cooperatives, insures against a poor harvest by purchasing futures contracts in the same commodity. If the

cooperative has significantly less of its product to sell due to weather or insects, it makes up for that loss with a profit on the markets, since the overall supply of the crop is short everywhere that suffered the same conditions. Whole developing nations may be especially vulnerable, and even their currency tends to be tied to the price of those particular commodity items until it manages to be a fully developed nation. For example, one could see the nominally fiat money of Cuba as being tied to sugar prices, since a lack of hard currency paying for sugar means less foreign goods per peso in Cuba itself. In effect, Cuba needs a hedge against a drop in sugar prices, if it wishes to maintain a stable quality of life for its citizens.

Delivery and condition guarantees

In addition, delivery day, method of settlement and delivery point must all be specified. Typically, trading must end two (or more) business days prior to the delivery day, so that the routing of the shipment can be finalized via ship or rail, and payment can be settled when the contract arrives at any delivery point.