Functions Advantages and Disadvantages of Commodity Exchange

In the Commodity Exchanges the commodities are not themselves dealt in. The dealings are made by the members of the Exchange. They may buy and sell both for themselves and for non-members. If they deal in the commodities for the non-members, they receive a commission from the latter. It is a general rule of the Exchange that every transaction should pass through brokers, even though the ultimate buyers and sellers are present in the floor. The transactions in the Commodity Exchange are made for forward delivery. There is no ready delivery of goods.

Functions of A Commodity Exchange

A Commodity Exchange performs the following main functions :

(1) It provides a place for future trading.

(2) It determines who may be members and who may use the exchange.

(3) It regulates business dealings.

(4) It establishes uniform grades for products and a system of inspection.

(5) It assists in settling disputes in the exchange.

(6)It acquires and disseminates market news.

Advantages of Commodity Exchange

The advantages of a commodity exchange are as follows: It-

  1. stimulates standardization and grading ;
  2. makes hedging possible ;
  3. establishes a free and open market where prices subject to the forces of supply and demand ;
  4. enables the owner of goods to carry surplus stocks until they are required ;
  5. equalizes prices between different geographical areas ;
  6. facilitates arbitrage, the practice of buying in one market and reselling in another at a higher price ;
  7. minimizes price fluctuations ;
  8. encourages the collection and dissemination of market news and information ; and
  9. simplifies financing.

Disadvantages of Commodity Exchange

The disadvantages of a commodity exchange are that :- it

(a) often permits destructive transaction to be completed by inexperienced or dishonest speculators and

(b) makes possible the unscrupulous manipulation of prices.

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