What are Commodities?

Commodities are things that people buy and sell. They are finished products as well as basic raw materials. Any tangible thing that is bought and sold can be considered a commodity. Securities, the shares of ownership of a company (common stock) and the debt obligations of companies, municipalities, and the federal government and its agencies (bonds), have traditionally been traded and regulated separately from commodities. However futures contracts have arisen on things that historically haven’t been considered as commodities, such as foreign currencies and stock indexes etc., Commodities has taken on and will continue on significantly broader dimensions.

Where are commodities traded?

Everywhere people buy and sell things. Some commodities are traded on a commodity exchange. In the United States and in most industrialized countries, commodity exchanges deal mainly in contracts for future delivery. A retail outlet, such as a grocery or department store, is not a commodity exchange because, while there are many buyers. There is only one seller, and prices are not subject to negotiable. In the United States, all contracts traded on a commodity exchange must be approved for trading by the Commodity Futures Trading Commission (CFTC), a government agency that regulates commodity futures trading.

What is a Commodity Futures Contract?

A commodity futures contract is a contract for a commodity that will be delivered at sometime in the future. It is not contract for current delivery. For example if someone buys 125,000 Swiss francs for immediate delivery, he is not entering in to a contract for future delivery. If he buys a contract of Swiss francs for delivery in three months, he is purchasing a futures contract. The buyer may choose to sell the contract prior to delivery on the appropriate date. Similarly, the seller of the contract may purchase the contract prior to delivery (thus closing out his position), or may deliver on the delivery date.

What Economic Purchase Does a Commodity Exchange Serve?

Commodity exchange enables individuals and institutions to transfer the risks of ownership of commodities onto a class of individuals known as speculators, who are willing to assume these risks. These local traders, who operate on the trading floor and trade for their own accounts, are doing just that. Nonmember traders who trade for themselves are also speculators expect, as nonmembers, they are not allowed on the trading floor.That is basically what the yelling and screaming on a trading floor is all about, individuals and institutions transferring risks back and forth among one another.If a wheat farmer, for example, wants to protect the price of his wheat crop that is due in three months, he will go into the futures market and sell short to protect his profit. If a cereal manufacturer wants to lock in the price of wheat three months in the future ,it will buy  futures contracts for delivery in the three months: and the local traders and outside speculators’ provide the liquidity that enables both the famer  and the cereal manufacturer to transfer the risks of their operations on to others. Let’s take another example. Assume that an importer is expecting a shipment of cuckoo clocks from Germany and must make payment in six months. Since the price of the German mark (Deutsche mark or D-mark) is subject to fluctuation, the importer can purchase a futures contract of marks for delivery in six months. This will enable him to avoid the uncertainty of not knowing what his plans accordinglyIf the importer purchases marks for future delivery and the price rises, he will have avoided playing the higher price because his price was locked in the moment he purchased his contract. But you may ask: What if the price of marks falls? Wouldn’t the importer have been better off if he had waited? The answer, of course, if yes, he would have been, but he didn’t want to take the risk. He preferred to pass the risk on to speculators, who were willing to assume it.

How Can I Sell Something That I Don’t Own?

Let’s assume that you are the owner of a bookstore and a customer asks to purchase a book that is not in stock. You tell the customer that you will order the book for him if he will put up a deposit of 10 percent as earnest money, and that the book will arrive in ten days. The customer gives you the deposit, and you order the book. This is a type of contract for future delivery. You have sold something that you don’t own, but expect to receive in ten days. In the language of commodity trading, you are considered to be “short” and the customer is considered to be “Long”.When the book arrives in your shop, you deliver the book to satisfy your obligation to the customer and he pays the balance owed. You have made delivery and received payment, and he has taken delivery and made payment.All this was made possible because the contract was for future, not present delivery. Once you understand this concept, you will be well on your way to understanding everything there is to know about commodity futures trading.

What Types of Commodities Are Traded on a Commodity Exchange?

The following are the examples of commodities that are traded on different exchanges Metals:  Gold, Silver, Platinum, Copper, Aluminum.Energy: Crude oil, heating oil, gasoline, natural gas, propane gas.Agricultural: Frozen orange juice, coffee, sugar, cocoa, corn, wheat, oats, rye, canola, live hogs, broiler chickens, lumber, butter, rice.Interest Rates: Eurodollars, Treasury Bills, Treasury bonds, Treasury notes, LIBOR (London Interbank Offered Rate)Stock Indexes: Major Market Index, Standard & Poor’s 500 Stock Index, Nikkei 225 Stock Average, Value Line Stock Index.Foreign Currencies: British pounds, Canadian dollars, Australian dollars,Deustche marks, Swiss francs, Japanese yen.

Different Commodity Exchanges

Americas

Asia

Europe

Oceania