Commodity Market

Commodities are goods such as gas, grain, cattle, foodstuffs and metals, bought and sold on the commodities market. Globally, there are 48 commodities exchanges, selling over a hundred different items. The world's largest commodity market is in Europe (Eurex, an electronic commodities exchange). Commodity exchanges and contracts have been around since the ancient Sumerian civilization traded mostly livestock and grain. Today, there are five categories sold on the worldwide commodity market; corn and other grains, energy products like oil and gas, precious metals, and softs (items like food, coffee and cotton) and livestock. For a product to trade on the commodity market, it has to be in its raw form.

Commodity markets are set up in much the same way as a stock market. The exchange floor is divided into sections known as "pits", where the traders stand all facing one another. Each commodity is handled in a different section, and for a trader to make it onto the floor, they have to be a member of the exchange. For a non-member to trade commodities, they must work through a brokerage firm that's an exchange member.

The commodity market serves as a safeguard against price fluctuations. A good example of a commodity deal is a coffee grower who wants to get a price for his crop before it's harvested, when a high supply may mean less demand. If the grower uses a futures contract, it can also be used to secure a loan. Manufacturers also benefit, because they know in advance how much the coffee will cost. If a commodity is to be delivered immediately, it's called a spot contract. Spot contracts are sometimes used to fill a futures deal.

A person that deals in the commodities market buys and sells futures with no plans to ever come in contact with the product in question. If the price of the commodity goes up, the contract increases in value, and if the price declines, the contract's value does as well. In most cases, the contracts are sold before the date of delivery. There are some advantages to dealing in commodities, such as decreased commissions and faster return on investment. The commodities market is very mobile, and prices can fluctuate with much greater frequency than the stock market. There is opportunity for fast profit, but there is equal opportunity for loss. If you're thinking about investing in the commodity market, you should learn more about the commodity you want to trade.