Do's & Don'ts for investors trading in commodity futures market

Planning

oi-Sneha

By Sneha B K

Updated: Thursday, August 30, 2012, 9:00 [IST]

Trading in commodities is gradually picking up, opening another avenue for investors prepared to take risk, apart from the risky equity option.

Before investing one should understand several basic facts. Once these are understood one should have little difficulty in understanding the nature of futures markets and how they function.

Market participants themselves should be aware of their rights as well as, more importantly, their obligations before investing in the commodity futures market.

Do's

• Familiarize yourself with all the provisions of Forward Contracts (Regulations) Act, 1952 dealing with futures trading in commodities and amendments thereof from time to time
• Understand the provisions and rates relating to the sales tax, value added tax, APMC Tax, Mandi Cess and Tax, octroi, excise duty, stamp duty, etc., as applicable on the underlying commodity of any contracts offered for trading by MCX.
• Read, understand and be updated about the guidelines and circulars of the Exchange and of the Forward Markets Commission issued from time to time and kept on the respective websites.
• Read the commodity contracts circulars issued & kept on MCX website and carefully note the contract specifications of the commodity in which you wish to trade. The contract specifications are subject to change from time to time.
• Before entering into buy and sell transactions please be aware of all the factors that go into the mechanism of pricing, trading, clearing and settlement.
• Read the product note of the commodity in which you wish to deal to understand the commodity and parameters that impact on the trading and settlement of the commodity.
• Understand the Delivery & Settlement Procedures given in the Exchange Circular of the commodity kept on the Exchange website that you wish to deal in the futures market.
• Study historical and seasonal price movements of the commodity that you wish to deal in the futures market.
• Keep track of Governments' Policy announcements from time to time of the commodity that you wish to deal in the futures market.
• Apply your own prudent judgment for investments in commodity futures and take informed decisions.
• Comply with Taxation and other Central Government/State Governments regulatory issues.
• Go through all Rules, Bye Laws, Regulations, Circulars and directives issued by MCX.
• Since futures trading attract various types of margins, be aware of the risks associated with your positions in the market and margin calls made from time to time.
• Collect/Pay Mark-to-Market margins Cheque on your futures positions on a daily basis from/to your Member.
• Be aware of your risk taking ability and fix stop-loss limits. Liquidate your positions at such levels to reduce further losses, if any.

Dont's

• Do not fall prey to market rumours.
• Do not go by any explicit/ implicit promise made by analysts/ advisors/ experts/ market intermediary until convinced
• Do not take trading decisions based on reports/ predictions made in various print and electronic mediums without proper evaluation.
• Do not deal based on Bull/Bear run of commodity markets sentiments.
• Do not trade on any product without knowing the risks associated with it.