InvestorQ : How is equity futures trading different from the trading in commodity futures market?
sara Kunju made post

How is equity futures trading different from the trading in commodity futures market?

Answer
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Rutuja Nigam answered.
1 year ago


At a conceptual level, both are similar types of trading based on demand and supply. Principally, the nature of trading in commodities is the same as in equities. While equities and F&O trade on the NSE and the BSE, commodities trade on the NCDEX and the MCX. However, that has changed now with the two stock exchanges BSE and the NSE also permitted to offer commodities trading. Like in case of equity trading, commodity trading also entails an initial margin, mark-to-margin and a settlement diary each month. You need to open a separate commodity trading account with your broker to trade in commodity futures. But who regulates the commodity markets?

In the past, the Forward Markets Commission (FMC) used to regulate the commodity futures market. Effective the Union Budget announced in Feb 2016, the FMC was merged with SEBI. Since then the trading in commodity futures is also regulated by SEBI. However, trading in commodity spot markets is regulated by the respective states. Let us see how trading in equity futures are different from trading in commodity futures.

Principally, there are 3 differences between equity futures and commodity futures trading. Firstly, all equity futures and options trades are necessarily settled in cash only i.e. profits or losses are credited or debited to the individual trader’s client account. Commodity futures can be settled by square up of positions or through actual delivery and the trader only needs to intimate the exchange in advance about their intent, well before the expiry date. Secondly, in case of equities, the spot equities and the equity futures & options trade in the same exchange. In case of commodities, the NCDEX and MCX are purely futures markets and spot trading does not happen in these exchanges. Thirdly, there is an interesting difference between options trading in the equity markets and the commodity markets. In the equity markets, futures on RIL and options on RIL; both have their underlying as the RIL stock. However, in case of commodity markets, the futures have the spot commodity as the underlying whereas the commodity futures have the futures as the underlying.