Commodity Glossary Every Beginner Should Know

Trading Basics

• Commodity — A raw or basic good, like gold, crude oil or cotton. One unit swaps for another of the same type.
• Spot Price — The price for immediate delivery. Settled right away.
• Futures Contract — A deal to trade a commodity at a fixed price. Settled on a later date.
• Lot Size — The fixed quantity one contract represents. MCX crude oil, for example, is 100 barrels a lot.
• Bullion — Gold and silver, traded in set purity and lot sizes.

Contract Mechanics

• Margin — The deposit you pay to hold a position. Just a fraction of the contract's full value.
• SPAN Margin — The risk model exchanges use to set margin. It's based on recent volatility.
• Mark-to-Market (MTM) — The daily step that credits or debits your account, based on that day's price move.
• Expiry — The date a contract ends and settles. Either in cash, or through delivery.
• Rollover — Closing an expiring contract, then opening the same position in next month's contract.

{
  "type": "quiz",
  "slug": "commodity-glossary-margin-quiz",
  "label": "QUIZ",
  "question": "What is 'margin' in commodity futures trading?",
  "correctOptionKey": "B",
  "explanation": "Margin is the deposit paid to hold a futures position, just a fraction of the contract's full value, which is what makes futures trading capital-efficient but also risky.",
  "options": [
    {
      "key": "A",
      "text": "The exchange's annual membership fee"
    },
    {
      "key": "B",
      "text": "A deposit that's a fraction of the contract's full value"
    },
    {
      "key": "C",
      "text": "A tax paid on commodity profits"
    },
    {
      "key": "D",
      "text": "The broker's commission on each trade"
    }
  ]
}

Market Participants

• Hedger — A business trading to protect a real price risk. A refinery locking in crude oil costs, for instance.
• Speculator — A trader betting purely on price direction. No business need behind it.
• Arbitrageur — A trader who profits from small price gaps between linked markets. This keeps prices in line.
• Tender Period — The window before expiry, usually 3 to 5 days. A deliverable contract's delivery process starts here.

Price Concepts

• Contango — When futures trade above spot. Often due to storage costs.
• Backwardation — When futures trade below spot. Often a sign of tight near-term supply.
• Open Interest — The total open futures contracts, not yet settled or closed. A gauge of market participation.
• Circuit Limit — The biggest price move allowed in a session, before trading pauses.

{
  "type": "quiz",
  "slug": "commodity-glossary-contango-quiz",
  "label": "QUIZ",
  "question": "What does 'contango' mean in a commodity market?",
  "correctOptionKey": "A",
  "explanation": "Contango describes a situation where the futures price sits above the spot price, often because of storage costs for holding the physical commodity.",
  "options": [
    {
      "key": "A",
      "text": "Futures price trades above the spot price"
    },
    {
      "key": "B",
      "text": "Futures price trades below the spot price"
    },
    {
      "key": "C",
      "text": "The exchange is closed for the day"
    },
    {
      "key": "D",
      "text": "A trader has defaulted on payment"
    }
  ]
}

Clearing and Settlement

• Clearing Corporation — The body that guarantees every exchange trade. It becomes the counterparty to both buyer and seller.
• MCXCCL — MCX's own clearing corp. It settles and guarantees every MCX trade.
• NCCL — NCDEX's clearing corp, standalone since 2018.
• Physical Delivery — Settling a contract by actually transferring the commodity. Common in bullion and base metals.
• Cash Settlement — Settling a contract with a cash payment, against a set reference price. Used for crude oil and gas on MCX.

Want the full picture behind these terms? Read futures versus options and review risk management basics.

Sources: MCX and NCDEX contract specifications and clearing-corporation documentation; standard commodity-market terminology.