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How does a Commodities Exchange Function

Commodities Exchange

While choosing to trade with the commodity market in India,you must know about how this market functions and its major exchanges.

The basic Functioning of Commodity Exchanges

There are three national commodity exchanges in India and one of them have to be chosen. A commodity exchange has a list of brokers as their members, for commodity live trading, who offer services for zero brokerage or for a fee to you.

It functions pretty much the same way like a stock market does. Consider the commodity exchange as a common place where traders can buy and sell commodities. Exchanges ensure flawless trading, which eliminates the need for middlemen and in return this helps the market to fix a price that is driven purely by demand and supply of the product.

How trading is Done

(i) Cash/spot commodity trading happens when the buyer and seller agree upon a price of the commodity and actual delivery of commodities take place.

(ii) Futures trading happen when the buyer and the seller happen to agree on a price of the commodity, but the delivery happens at a future date. Commodity manufacturers /producers look out for the fall of prices in the future and they hedge their produces while commercial consumers lock in a maximum number of goods in order to avoid paying higher prices later.This entire process is done electronically. The producer submits an offer price and the future delivery date of a certain commodity on this exchange. The seller, who agrees to pay that price, enters into a contract with a buyer. Almost all transactions happen the similar way, allowing the actual flow of demand and supply to determine the price.

Commodity Exchanges of India

There are twenty-four commodity exchanges in India for commodity trading, and three national level exchanges through which all permitted commodities can be dealt in

.• National Commodity and Derivative Exchange (NCDEX)

 • Multi Commodity Exchange of India Ltd (MCX) – MCX online

 • National Multi-Exchange of India Ltd.

All the three have online trading and settlement systems and hence, you can trade in them using an online trading account.