Commodities are anything that can be bought and sold such as grains, gold and oil. People trade on commodities based on speculation.
A commodities exchange is an association that arranges for the trading of different commodities. Commodity markets trade in agricultural goods and raw materials (like wheat, coffee, oil, metals, etc) and contracts derived from them. These contracts can involve spot prices, forwards, futures, options on futures, interest rates, environmental instruments, swaps, or ocean freight contracts.
Commodities exchanges, generally trade on commodities futures. For instance, a farmer growing wheat sells a future contract on wheat, which will not be reaped for some time, and can rest assured he gets the contracted price when he delivers the produce. A cereals manufacturer purchases the contract now and promises that there will be no change in price when the produce is delivered. This gives dual benefits as the farmer is protected from price slumps and the manufacturer from price hikes.
Commodity markets deal in raw or primary products that are traded on commodities exchanges. From cereals to oil and diamonds to coffee, the commodity market throws up a plethora of investment opportunities, both short-term and long-term.
Commodity market transactions allow not only the buying and selling of material goods, but also the right to sell goods. Thus, the majority of dealings in a commodity market are done through the buying and selling futures contracts.
Commodity trading is based on the laws of demand and supply where forecasts are made regarding the expected annual yield and its approximate demand. This clear-cut prediction forms the basis for determining the prices of the commodities.
Commodities futures, or futures contracts, are an agreement to trade on a commodity at a particular future date and at a predetermined price. Commodity prices are subject to frequent changes. An increase in price benefits a buyer of commodities futures as he acquires the product at the reduced, predetermined price and can trade it for a better market price. A seller profits from a price decrease, since he can purchase the commodity at the reduced market price, and sell it to the buyer at a greater, predetermined price.
Futures contracts not only precisely evaluate the price of each commodity but also predict the future value of a commodity.
Options on futures contracts are agreements to buy or sell at a predetermined price on a definite date. They offer protection against unforeseen price fluctuations and helps minimize the risk of loss. The loss suffered by the buyer of the commodity option, is limited to the sum invested in the commodity.
Commodity charts help determine price trends. Commodity charts are graphs, that are regularly updated and help mark the points of fluctuations. Traders and speculators religiously study these charts that contain up-to-the-minute price variations.
The commodities exchange circulates these charts to its members on line together with other crucial data pertaining to issues that would impact the demand and supply of the commodity.
Many people are investing in commodities as a means of receiving higher returns. It is not that difficult to arrive at the right commodity investing option. For example, if anticipated monsoons were envisaged to hinder the sunflower crop, the oil supplies would be majorly hit. Then, when the demand for sunflower oil outstrips its supply, it understandably leads to an oil price hike. Thus, investing in sunflower oil within the said period would be a profitable investment decision.
The commodity broker is an individual who liaises between clients and the commodity exchange. He is paid a commission for drawing up contracts and effecting sales.
Today, on line trading options has eliminated the need for traders to be physically present to place their bids. Thanks to computerization, every bid is automatically recorded, computer printouts of contracts generated and the contracts are delivered within a specified period.