The trade in raw materials and basic goods that humans need, commodities, a form of investing, has existed for thousands of years. In the beginning of barter, goods were exchanged for goods, later for gold and today we pay with money. What are commodities? What are commodity futures? What are futures contracts? What does the term commodity refer to? What is the big advantage of commodities? And the disadvantage of trading in raw materials?
Truly billions of people depend on everyday goods such as cotton, wheat, grain and oil. To make clothes, to bake bread or as fuel for the car. We also call these goods that we need every day as commodities . Traditional goods that people need and depend on have been traded for thousands of years and the markets for these commodities will always exist.
The price of products such as wheat or cotton, goods that people need in their daily lives, is determined by the interaction between supply and demand.
What are commodities?
Commodities is a form of investing in the trade of:
- Raw materials,
- Basic goods, and
- Bulk goods.
The term commodity is used in the world of futures trading for raw materials. The properties of these raw materials are generally that they can be stored for a longer period of time. This creates a certain degree of stability in the value of these raw materials.
What do commodities consist of?
There are different commodities, namely:
- Precious metal, such as: gold, silver and copper,
- Energy, such as: Natural gas, oil and kerosene,
- Agricultural products such as: Grain, wheat, cotton and potatoes,
- Mineral resources such as: Sand, salt and cement.
Investing in commodities
Investing in commodities is nothing more than investing in raw materials, such as gold, oil, cotton or wheat. These raw materials, the commodity, are traded with futures contracts.
Commodities are mainly traded via the stock exchange with futures contracts.
What are futures contracts?
Forward contracts, or future transactions, are a standardized contract in which the buyer and seller are obliged to buy or sell at a predetermined price:
- Quality, and:
- Price, at some point in the future.
Investing in commodities can turn into a derivative if trading (sometimes) takes place in contracts, because the contracts depend on the value of the underlying raw materials. Underlying raw materials may be related to a crop failure or the discovery of oil fields, causing prices to fluctuate considerably. This makes trading in futures contracts particularly interesting.
Commodity future trading
Futures are traded on all major exchanges in the world, such as:
- New York Mercantile Exchange (NYMEX) and the
- Chicago Exchange.
In Europe, futures are traded via a screen exchange. In Chicago, however, some futures are still traded on the floor.
“Financial futures” versus “commodity futures”
Forward contracts, or futures traded on all major exchanges, consist of:
- Financial futures with, for example: Shares, interest rates and currencies as underlying values, and from:
- Commodity futures with, for example: Precious metals, agricultural products and raw materials.
Most trading (still) takes place with financial futures.
The big advantage of trading in commodities is that you know in advance how much money has to be paid.
The major disadvantage of trading in commodities is that if a price has been agreed for a certain product, but the market price is too low, then people pay too much.