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A physical substance, such as food, grains and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through future contracts.The price of the commodity is subject to supply and demand. Risk is actually the reason exchange trading of the basic agricultural products began. For example, a farmer risks the cost of producing a product ready for market at sometime in the future because he doesn't know what the selling price will be.

Organized market place where ownership titles of future contracts of standardized quantities or volumes of certain commodities (at a specified price and to be delivered on a specified date) are traded by its members. Although samples of the commodities are physically examined and graded, physical delivery of the commodity rarely occurs because the delivery contracts are usually exchanged or closed out (traded out) before their expiration date.

A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.

Each commodity is different. There are even different delivery months of the same commodity. Understanding the futures contract specifications is at the heart of knowing the rules that govern trading a commodity futures contract, as well as the price movement value of each commodity. The Futures contract specifications which are printed in Commodity specifications. Trading on futures contract is based on specification of quality, quantity, price, trading procedures, delivery procedures and settlement mechanism. This comes all together as contract specification

Any investor who wants to take advantage of price movements and wishes to diversify his portfolio can invest in commodities. However, retail and small investors should be careful while investing in commodities as the swings are volatile and lack of knowledge may result in loss of wealth.Investors must understand the demand cycles those commodities go through and should have a view on what factors may affect this. Ideally, you should invest in selected commodities that you can analyze rather   than speculate across products you have no idea about. Investing in commodities should be undertaken as an option in your portfolio and not as the first destination for all your money.

There are 2 basic types of analysis you can take when approaching the Commodity:

1.Fundamental analysis

2.Technical analysis.

There has always been a constant debate as to which analysis is better, but to tell you the truth, you need to know a little bit of both.

1.      Fundamental Analysis

Fundamental analysis is a way of looking at the market through demand and supply of the commodity which may be affected by economic, social and political forces of the country.

2.      Technical Analysis

Technical analysis is the study of price movement. The idea is that a person can look at historical price movements and based on the price action, one can determine at some level where the price will go.  By looking at charts, you can identify trends and patterns which can help you find good trading opportunities.

Trade on Low Margin: Commodity Futures are traded with a low margin amount roughly varying from 4% to 8% depending on the commodity. It facilitates a trader to take large positions with small capital.

Hedging: It provides a platform for producers/importers to hedge their positions according to their exposure in physical commodity

Ransparency and Fair Price Discovery: Trading in commodity futures is transparent and a process of fair price discovery is ensured through automated system.

No Insider Trading: Dealing in commodities is free from the evils of insider trading. Besides, there are no company specific risks as those seen in stock markets.

Simple Economics: Commodity trading is about the simple economics of demand and supply. More the demand for a commodity higher is its price and vice versa. 

Commodity trading is nothing but trading in commodity spot and derivatives (futures). If you are keen on taking a buy or sell position based on the future performance of commodities like gold, silver, metals, crude oil, or agricultural commodities then you could do so by trading in commodity derivatives.

Trading in commodities futures is quite similar to equity futures trading. You could take a long position (where you take a contract to buy) or a short position (where you take a contract to sell it). Simply speaking, like in equity and other markets, if you think prices are on their way up, you take a long position and when prices are heading south you opt for a short position.

Generally, exchanges make a provision for physical delivery for settlement of contracts, but it is not mandatory and varies from exchange to exchange. At present there is no such provision available with Nepalese Exchanges and thus contracts are settled for cash.

The commodity market is mainly driven by demand and supply factors and also inventory status, when it comes to perishable commodities such as agricultural products and high demand products such as crude oil. Like any market, the demand-supply equation influences the prices. Similarly, Variables like weather, social changes, government policies and global factors influence the prices of commodity in the market.

Commodity Market is recognized by the government of Nepal and 10% capital gain tax is also levied on profits made by a client. However, though there steps being taken to assign a governing body it has not yet been finalized.

It is important to understand the risk associated with the market and one should get handful of experience on demo trading platform before starting live trading. To register as a client the following documents are required:

• Client Agreement with ESPL
• Copy of Identity Proof (Citizenship/Passport/Driving License)
• Bank account with Designated Bank
• 2 Passport Size Photographs