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How Does A Commodities Exchange Function? Which Are the Major Commodity Exchanges in India?

The working of a commodity exchange is very similar to that of a stock market. Read on to know more.

A commodity exchange acts as a portal or a common place where traders can buy and sell commodities. Such exchanges enable seamless trading, eliminate the need for middle men and allow the market to fix a price that is driven purely by demand and supply of the product.

How does a commodity exchange work?

Just like the stock market, a commodity exchange serves as a marketplace for buyers and sellers to engage in trading commodities directly. Trading can be done in two ways: cash/spot and futures. In the former method, the buyer and seller agree upon a common price of the commodity, and actual physical delivery of that commodity takes place. The latter is different. Futures contract do not involve spot delivery of commodities; delivery is fixed for a future date at a price agreed by both the parties.

Just like a stock exchange, a commodity exchange serves as a marketplace for buyers and sellers to engage in trading commodities directly.

People engage in this kind of trading mainly because each party gets something out of the deal. Commodity manufacturers/producers want to hedge their produces against fall in price in the future. On the other hand, commercial consumers want to lock in goods at a favorable price in order to avoid paying a higher price later. And individual traders wish to benefit from future movements of commodity prices.

The entire process is done electronically. The producer submits an offer price and the future delivery date of the commodity on this exchange. The seller, who agrees to pay that price, enters into a contract with the buyer. Almost all transactions take place in the similar manner, allowing the actual demand and supply to determine the price.

In India, there are three major national commodities exchanges: National Commodity and Derivatives Exchange Ltd, Multi Commodity Exchange of India Ltd and National Multi Commodity Exchange of India Ltd. In addition to these, 18 more domestic commodity exchanges in India are known to function.

Any commodity exchange serves three main functions:

  • Defines rules and regulations of trading to carry out uniform trading practice
  • Provides dispute settlement mechanism
  • Circulates price movements and market news to the participating members

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