Commodity Glossary Every Beginner Should Know

Commodity trading comes with its own vocabulary. Most of it isn't obvious from context. This commodity glossary covers the terms that actually come up. Grouped by theme, in plain language.

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.

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.

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.