In this article, We learn about "Commodity ".Let's Go!
A A commodity is a raw or unprocessed material that can be bought or sold to make something else that is ultimately consumed.
Goods used as materials in the production of goods or services.
Commodities have monetary utility and are considered physical assets.
Commodity examples include those picked from the ground and those that must be dug from deep underground.
Typical items include:
- "energy" (crude oil, gasoline, heating oil, natural gas)
- "metal" (gold, silver, copper, platinum, palladium)
- "soft drink" (cocoa, coffee, cotton, orange juice, sugar)
- "grain and oilseed" (corn, soybean, soybean meal, soybean oil, wheat)
- "Livestock/Meat" (raised cattle, live cattle, lean pigs)
- "Other" (wood, dairy)
Crude oil is currently the most actively traded oil in the world.
Commodities are traded on Exchange .
The three main commodity markets in the world are:
- CME Group (formed by merger of Chicago Mercantile Exchange and Chicago Board of Trade)
- Intercontinental Exchange
- London Metal Exchange
For trading purposes, a given item is usually interchangeable.
A barrel of oil is considered the same as any other oil.
To be traded in a market, a good must be interchangeable with another good of the same type and grade.
This means that for traders, gold is gold: no matter where it is mined or by which company.
The term for this quality in
items is substituted for .
They are divided into two varieties:
- hard commodities are metals or energy that are mined or extracted from natural resources. Soft commodities are agricultural, grown or cultivated.
- Soft commodities tend to be seasonal and perishable.
Buying and selling commodities for profit is called commodity trading .
Commodity trading is divided into two types:
- Spot Market
- futuresmarket
The spot market is for commodities that are delivered immediately, and the futures market is for commodities that are delivered sometime in the future.
Most commodity traders are speculators and do not wish to take delivery of the commodity they are trading, so most futures contracts are closed before the delivery date.
Futures contracts are traded on futures exchanges, and most commodities are tied to a specific local exchange.
Who trades goods?
Commodity market participants fall into two categories:
- Hedgers (aka "Ads"). These businesses are actually producing, transporting, processing, or otherwise dealing with the goods in question. They include oil and gas producers and refiners, miners, grain processors, farmers and meat processors.
- Speculators. These include banks, hedge funds, and individuals who trade commodities. They speculate that the price of a commodity will rise or fall within a certain period of time and trade it for profit.
How do you trade commodities?
For the individual trader, there are multiple ways to get into the commodity markets that don't involve growing corn or raising hogs yourself.
Including:
- futures contracts. A futures contract is an agreement to buy or sell a certain amount of a commodity at a certain price in the future. The buyer of a futures contract could theoretically profit if the price of the futures contract rose; conversely, the seller of the futures contract could profit if the price fell (this is called shorting). In futures markets for retail traders, physical "delivery" of commodities is rarely permitted; usually, contracts are "closed out" before expiration.
- futures options. For example, put or call options on crude oil or gold are traded on many futures exchanges. These contracts grant the holder the right, but not the obligation, to buy or sell a specific futures contract at a specific price on or before the expiration date.
- Exchange Traded Funds (ETFs). ETFs are securities that trade like common stocks and can be bought and sold on exchanges. Many ETFs are linked to a single commodity, a basket of commodities, or a commodity index.
- traditional stocks. Many public companies are involved directly in commodities and commodities markets (such as mining companies, oilseed processors, and oil and gas exploration companies) or indirectly (such as agricultural equipment manufacturers).
As you can see, not only items are bought and sold "on the spot", but purchased and paid for instantly.
There are also "forward contracts," where products can be bought or sold at a fixed price for delivery at a specific time in the future.
There are also ‘options’ and ‘futures’. Options give a party the option to buy or sell at a future time, but not the obligation to do so. Futures are similar, but require each party to deliver a commodity or make payment.
It's easy to see that options and futures are like bets on the future price of the commodity they're constructed from. Therefore, they can be used to hedge "real" trades. For example, airlines may purchase forward contracts or opt for options or futures to lock in future fuel prices.
But these commodity derivatives are also opportunities for speculation — buying and selling in the belief that price changes will be profitable. Even better (or safer) if you can hedge your bets with options or futures.
Private investors can gain exposure to commodity markets by investing in funds, which in turn invest in commodities.
Exchange-traded funds (ETFs) listed on the stock market are an increasingly popular form of investing in commodities.
You can buy and sell ETF shares, which are backed by physical commodities, just like any stock.
Compared with other investment funds, ETF managers charge lower fees, and the process of buying or selling ETFs is faster and easier.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
