What is a commodity?
What is a commodity?
A commodity is an article of commerce which is produced, sold, bought and consumed. Worldwide there are commodity exchanges (both regulated and un-regulated markets), where they are traded between buyers and sellers. The major exchanges in the US are all federally regulated. There are 4 characteristics of a commodity.
- The product is generic - the same from seller to seller.
- Shoppers buy on price, not quality.
- The product is sold by many competing sellers.
- The product's price is determined by market supply and demand.
What are the commodities that are traded in regulated markets?
- Grain: Corn, wheat, soybeans, oats soymeal, soyoil.
- Livestock and Meat: Hogs, cattle, feeder cattle, pork bellies.
- Metals: Gold, silver, copper, platinum, palladium.
- Food and Fiber: Coffee, cocoa, sugar, orange juice, cotton.
- Energy: Crude oil, heating oil, gasoline, natural gas.
- Finance: Stocks, bonds, currency.
Three common types of markets are:
- Spot Markets: Direct purchases for immediate consumption.
- Futures and Forward Markets: Agreements to pay now and receive/deliver later.
- Forwards and futures reduce the risks by allowing the trader to decide a price today for goods to be delivered in the future.
- Derivatives Market: Purely financial transactions based on physical trading.
Who is a Commodity Trader?
Any person who trades in commodities out of interest or to make money is a community trader. Since this is a speculative market, the person must be willing to take risks. A commodity trader should also be prepared to suffer losses.
What are the advantages of trading in the commodity market?
Shifting demand and supply make the prices of commodities fluctuate on a daily basis. Herein lies the opportunity to make big money - if the trader can anticipate the market movements properly. Experience of course plays a big role in this. There can even be major shifts in supply and demand, influencing the market trends for longer durations - weeks, months and even years. Thus doing it right has big dividends. However, trading is not without risks as even many experienced hands have suffered huge blows.
Futures Contract - what is it?
A commodity futures contract is an agreement to either deliver or accept delivery of a specified commodity at a specified price, quantity and grade. The contract calls for delivery at a future date and designated location. The value of the contract is determined by the price and quantity of the underlying commodity.
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