In comparison with some of the other financial instruments, even as a beginner you likely already have a general understanding of what a Commodity is. However, you may not be familiar with what the Commodity Market is and how it operates. Let’s get into the nitty-gritty bits of trading Commodities.
A Commodity is any raw material or agricultural product that can be used in commerce. There is a standard quality that is expected with a specific Commodity, however, there is a possibility that it may differ slightly. Commodities are bought and sold worldwide in relation to the global trends of supply and demand. Some traditional Commodities are precious metals, coffee, beef, and oil. However, with the advances in technology, there are also new types of Commodities including Foreign Exchange, emissions credits, and bandwidth.
The most common way the Commodities are purchased or sold is through futures contracts on financial exchanges. There are two types of transactions that can be made on a Commodity Exchange. The first type is a buyer or producer that uses futures contracts for hedging, while the second type is a speculator.
A speculator is an investor who trades Commodities with the goal of profiting from the high degree of daily range in value of the markets. These investors do not want to take physical ownership of the asset at the end of the futures contracts. Instead, they wish to take advantage of the liquidity of the market and the volatile price movements. As the demand for a Commodity increase, so does the price. The opposite occurs when the demand for a Commodity decreases.
There are approximately 50 major Commodity Markets around the world that operate close to 24 hours a day, 5 days a week. Despite the long hours that allow Commodities to be traded, certain times of day show varying degrees of participation, liquidity, and pricing volatility.
In conclusion, the Commodity Market has a tendency to attract investors who are interested in volatile price movements. The markets are constantly fluctuating in relation to supply and demand needs around the world. However, unlike fluctuations in other markets, the Futures Contracts are based on the prices of physical goods.