InvestorQ : If I have the required funds, should I buy the commodity in the spot market or should I buy it in the futures market?
Rishita Das made post

If I have the required funds, should I buy the commodity in the spot market or should I buy it in the futures market?

Answer
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shrinidhi Rajan answered.
2 years ago


The big difference between the commodity spot market and the commodity futures market is that in commodity futures you can actually trade on margin. That means by paying a margin of 8-10% of the notional value of the commodity contract, you can take a much larger position than you can afford. This is extremely useful for someone who is looking to hedge their position. For example, if you are looking to receive a consignment of Zinc after 3 months and are looking to protect against the risk of a rise in prices then you can buy 3-months Zinc futures today by paying a small margin and the contract can be reversed when the actual consignment is received. That way by paying a small margin you can protect against the price risk of Zinc. So depending upon you requirement, time-frame and your expectation of the commodity you want to buy, act accordingly.