Stock And Commodity Market Bcom Notes
Read this article to learn about Commodity Exchanges. After reading this article you will learn about: 1. Definition of Commodity Exchanges 2. Objectives of Commodity Exchanges 3. Nature 4. Function 5. Services.
Definition of Commodity Exchanges:
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A commodity exchange is an organised market that functions under established rules and regulations.
This market is the place for the purchase and sale of commodities.
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J. F. Pyle has defined organised market in this way:
Commodity exchanges are specialised organised markets which provide a place where their members buy and sell commodities or contract for future delivery under established rules and regulations.
The commodities which are generally traded in at the commodity exchanges include the following:
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(i) Natural produce of the soil e.g. cotton, wheat, tea, jute etc.
(ii) Mineral products like copper, gold, mica, lead etc.
(iii) Some manufactured products like gunny bags, clothing, hides, artificial jams etc.
All types of commodities are not fit for dealings in the commodity exchanges.
The products which possess the following characteristics are fit for dealing in commodity exchange:
1. Homogeneity:
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The commodity must be homogeneous i.e., all units of a particular commodity must be perfectly identical so that all dealers may mean the same commodity when they mention it in their dealings.
2. Durability:
It must be durable so as to last for a period of a future contract (ordinarily more than one year). If it perishes rather quickly, contracts for its purchase and sale will be frustrated.
3. Gradability:
The commodity should be such as will lend itself to grading. If the commodity cannot be classified into well-known grades, trading will be difficult for every time the quality will have to be ascertained.
4. Price Fluctuation:
There must be frequent fluctuations in the price of the commodity. If there were no price fluctuations, the speculators would have no intention to speculate in it at the exchange.
5. Open Supply:
The supply of the commodity should be open and free and should not be monopolized by one or a few persons. Again, the supply of the commodity or its price must not be controlled by the Govt.
Objectives of Commodity Exchanges:
The organised market represents a public organisation consisting of buyers, sellers, producers, traders and dealers dealing in one or more commodities which constitute the articles of trade in the market. The exchange for commodity is a private association of dealers and is not for making money or profit or for fixing prices.
Its objectives are to provide an open platform for the interaction of free play of the forces of demand and supply. It only registers the prices reflecting the forces of demand and supply. Buying and selling, trading practices and actual working of the organised market are governed by a code of rules and regulations and these can ensure fair dealings, fair prices and equity.
Nature of Commodity Exchanges:
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Organised market has the following features:
1. Best facilities available for close and continuous contact between total demand and total supply both present and potential.
2. All businesses are governed by rules and regulations and these rules are strictly enforced by the exchange authorities.
3. Usually the exchange enjoys internal autonomy and it is self-regulated, self-administered and self-disciplined autonomous body. At present, almost in all organised markets there are special legislations to control the activities of these organised markets.
4. There is free competition of buyers and sellers. The forward markets for commodities and securities are also known as two-way auction markets. Open public outcry gives offers and bids by sellers and buyers. They also use finger signals to declare their prices and amounts.
5. Every forward market has a clearing house organisation to facilitate clearing of all dealings and their settlement. The clearing house guarantees payment of dues and taking and giving of delivery of commodities or securities during the settlement period.
6. An organised market acts as a clearing house of market information, i.e., collection of all facts and figures and regular publicity of all relevant statistical information which helps the traders to estimate and forecast price trends, changes in demand and supply. Constant price quotation services enable people to make their purchases and sales with certainty and confidence.
7. The speculative trader is a necessary and vital part of any broad and stable commodity or securities market. Speculation is an integral part of market mechanism whether in stock exchange or in commodity exchange.
8. It is a convenient central market place.
Functions of Commodity Exchanges:
Commodity exchanges are generally utilised for wholesale dealings in agricultural commodities or the products of some important primary industries like lumbering.
These exchanges perform the following important functions:
1. Providing a Market Place:
A commodity exchange provides a convenient place where the members can meet at fixed hours and transact business in a commodity according to a certain well established rules and regulations. This type of facility is very important for trading in such commodities as are produced in abundance and cover a very wide field as far as trading therein is concerned.
2. Regulating Trading:
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As organised markets commodity exchanges establish and enforce rules and regulations with a view to facilitating trade on sound lines. The rules define the duties of members and lay down methods for business transaction.
3. Collecting and Disseminating Market Information:
The buyers and sellers on the commodity exchange enter into deals for settlement in future after making an assessment the trends of price and the prospects of a rise or fall in prices of a commodity. The commodity exchange acts as an association of these traders collecting the necessary information and the relevant statistical data and publishing it for the benefit of traders all over the country.
4. Grading of Commodities:
Commodities which are traded on the commodity exchanges have, to be graded according to quality. In this manner, the dealers can quickly enter into agreements for the purchase and sale of commodities by description.
5. Settling Disputes through Arbitration:
The commodity exchange provides machinery for the arbitration of trade disputes.
Services of Commodity Exchanges:
While performing these functions the commodity exchanges render a variety of valuable services to the producers, consumers, traders and others in the community.
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The most important of such services are as follows:
1. The exchanges provide a ready and continuous market for the purchase and sale of commodities. The producer is enabled to be independent of the middlemen.
2. By providing hedging facilities, the commodity exchanges reduce the effect of fluctuations in price.
3. The commodity exchanges provide the producers an opportunity to transfer their risk to the professional risk-bearers.
4. By providing continuity in the trading of commodities, the commodity exchanges induce bankers and financiers to lend against commodities.
5. The commodity exchanges provide facilities and opportunities for arbitrating and thus equalize the price levels of commodities at various centres.