The commodity market is made up of exchanges where contracts for commodities are bought and sold. ‘Commodity’ is simply the name used to refer to physical goods in their raw form that are bought and sold at these exchanges. Corn, aluminium, natural gas, RBOB gasoline and frozen concentrated orange juice are all examples of commodities that are traded.
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The concept of a commodities market originated from farmers trading wheat and corn at a centralised market. When demand for standardised contracts and buyer security became apparent in the 1800s, the idea of the commodity futures market was born and still remains the template for commodity trading to this day.
The invention of the futures market has allowed for the trade of a huge variety of products all around the world. There are 48 primary commodity exchanges throughout the world that deal in over 100 different commodities. Each commodity exchange specialises in a particular subset of commodities, such as the Wealth Exchange (WEX) in Nepal that specialises in gold and silver. As well as precious metals, markets exist for agricultural products, such as rubber and coffee, energy products, such as propane and ethanol, environmental commodities such as carbon emissions and new commodities, such as polypropylene.
The trading itself is conducted in commodity exchanges, which facilitate and regulate the buying and selling of futures contracts for the various commodities. They help to promote fair trade practices by setting limits on the prices of a particular commodity on a particular day and record and display all the trades and subsequent price fluctuations for each transaction and commodity. Traders make their bids on the commodity exchange floor by means of open outcry.
Each commodity in the commodities market is sold to a minimum quantity and quality as set by the regulators of the exchange. The price that a commodity is traded for can vary greatly from day to day, and is dependent on a large number of factors. Factors affecting commodity prices range from the weather to international politics, so the commodities market can become as volatile as the factors that influence it.
Commodity price indexes and commodity price charts are invaluable tools for those who choose to speculate on the market, and the ability to decipher this wealth of ever-changing information is paramount in generating success in commodity trading.
The trading itself is generally carried out by way of a commodity futures contract. A futures contract is basically an agreement reached on the commodity futures market between seller and buyer to provide a set amount of a commodity for a set price at a set time. These contracts are employed as a hedge against potential losses due to fluctuating market conditions. They also allow those who can predict market rises to generate a tidy profit by trading in these contracts, having no actual desire to take ownership of the commodities that they represent.