STUDY ON COMMODITY TRADING ANALYSIS AND INVESTOR’S PERCEPTION

Abstract

Commodity trading is as old as human civilization and one of the earliest economic pursuits of mankind. Over the centuries, commodity trading has evolved from the barter system to spot markets to derivatives markets. In barter system, goods were exchanged between two parties with matching and opposite needs (for example, bags of wheat were exchanged for cattle). Over a period of time, commodities brought from distant places were exchanged for gold and silver. With the introduction of Money as a medium of exchange, there was a paradigm shift in commodity trading with the value of commodity being expressed in monetary terms and trading in commodities was conducted mainly through the medium of currency. Commodity spot markets evolved in many places and the counterparties met at these common places where goods were brought for immediate sale and delivery at the market price decided by the demand and supply forces. In commodity spot markets, traders sell goods such as rice for immediate delivery against cash. At some stage, counterparties started entering into agreements to deliver commodities (e.g.: wheat) at a specified time in future at a price agreed today. These forward contracts, more often than not, were not honored by either of the contracting parties due to price changes and market conditions. A seller pulled out of the contract if the spot price was more profitable for him than the contracted price. A buyer also backed out from executing the contract on maturity if he was able to get the commodity at a cheaper price from the spot market. Futures emerged as an alternative financial product to address