It links the producers of the commodities effectively with their commercial consumers.
Commodity trading mainly takes place in the commodity markets where raw or primary products are usually exchanged.
The raw commodities here are traded on regulated commodities exchanges, in which they are bought and sold in standardized forms of contracts.
Commodity market is one of a few investment areas where an individual with limited capital can make extraordinary profits in a relatively short period.
For example, Richard Dennis borrowed $1,600 and turned it into a $200 million in about 10 years. Nevertheless, because most people lose money, commodity trading has had a bad reputation, as being too risky for the average individual.
Commodity trading is buying and selling of futures and the future options. The truth is that commodity trading is only as risky as one wants to make it.
History of Commodity Market
Modern Commodity Market have their roots in the
trading of agricultural products.
Wheat and corn, cattle and pigs, were widely traded using standard instruments in the 19th century in the United States.
Historically, in ancient times Sumerian use of sheep or goats, or other peoples using pigs, rare seashells, or other items as commodity money, have traded contracts in the delivery of such items, to render trade itself more smooth and predictable.
A commodity either can be a raw (unrefined) product (like Corn, Gold, and Oil) or can be a financial instrument (bonds, FOREX, or financial indexes, like the Standard and Poor 500).
Size of the Market
The trading of commodities includes physical trading of food items, Energy and Metals, etc. and trading of derivatives.
In the five years up to 2007, the value of global physical exports of commodities increased by 17% while the notional value outstanding of commodity OTC derivatives increased more than 500% and commodity derivative trading on exchanges more than 200%.
Agricultural contracts trading grew by 32% in 2007, energy 29% and industrial metals by 30%.
Precious metals trading grew by 3%, with higher volume in New York being partially offset by declining volume in Tokyo.
OTC trading accounts for the majority of trading in gold and silver
• Abuja Securities and Commodities Exchange •Bhatinda Om & Oil Exchange Bathinda •Brazilian Mercantile and Futures Exchange •Chicago Board of Trade •Chicago Mercantile Exchange •Commodity Exchange Bratislava, JSC •Dalian Commodity Exchange •Dubai Mercantile Exchange •Euronext.liffe •Intercontinental Exchange
• Minneapolis Grain Exchange •Multi Commodity Exchange •National Commodity and Derivatives Exchange •National Multi-Commodity Exchange of India Ltd •National Food Exchange •New York Mercantile Exchange •New York Board of Trade •Rosario Board of Trade •Steelbay
• Kansas City Board of Trade •London Metal Exchange •Winnipeg Commodity Exchange •National Spot Exchange
Recent trends in Commodity Market
The 2008 global boom in commodity prices - for everything from coal to corn – was fuelled by heated demand from the likes of China and India.
Speculation in forward markets.
Farmers are expected to face a sharp drop in crop
prices as a result of bad rainfall.
Other commodities, such as steel, are also expected to
fall due to lower demand
Many different factors affect the prices of commodities.
This includes taxes, money supply, and inflation. Other factors such as transportation and its costs, Politics, weather and technology and its changes can have an effect as well.
Factors Affecting Comodity Prices
Futures’ trading is the process of trading commodities. As in other cases of investments, such as stocks and bonds, when trading futures, one actually does not buy anything or own anything.
It is just about speculating on the future direction of the price in the commodity one is trading.
Commodity and Futures contracts are similar as
Early days "future" contracts (agreements to buy now, pay and deliver later) were used as a way of getting products from producer to the consumer.
These typically were only for food and agricultural
Now it is used for every metal.
Future contract for commodity trading and for share
trading is all different from one another
Even though the profits in the case of commodity are quite large, it is quite difficult and is practically impossible to make consistently correct decisions all the time about what and when to buy and sell.
Commodities count as extremely lucrative investment opportunities due to their liquidity, as the speculators do not have to hold onto them. However, risk management strategies play an important role for commodity trading.