How to Define a Commodities and Futures Market
A commodity market is a financial exchange on which individuals buy and sell naturally occurring resources and semi-finished goods called commodities. The prices in such a market are driven by supply and demand among commodity producers and consumers. Since only manufacturers and merchants represent the primary parties for whom commodities bear intrinsic value, the majority of commodities trading is done using derivatives contracts. Called commodity futures contracts, these contracts are traded in a speculative secondary market called the futures market.
Other People Are Reading
-
Commodities
-
In the broadest sense, a commodity is any material good that may be bought and sold. Specific to commodities markets, a commodity is any natural resource (raw or semi-finished) or semi-finished manufactured good that has nutritional and or industrial value in the production of finished goods. Examples of commodities include valuable metals, such as gold and silver; agricultural products, such as soybeans, wheat, and red meat; and all grades of crude oil.
Commodities Markets
-
Commodities are traded worldwide in actual physical locations, similar to shares of stock in a stock market. In the United States, the Chicago Mercantile Exchange is one of the largest commodities market settings for commodity producers and consumers to trade. The advent of worldwide information networks now links such exchanges all over the world, creating uniformity of prices. The prices created by these exchanges partly determines the prices of food and finished merchandise.
-
Futures Contracts
-
A commodity futures contract, or futures contract, is a financial derivative for commodities that functions in a similar manner as an option contract for stocks. Unlike an option contract, a futures contract obligates both parties to carry out the transaction on the expiration date unless the holder/buyer sells the contract in the secondary futures market.
Speculative in Nature
-
A futures contract held through expiration requires a producer to deliver and for a buyer to receive the respective commodity in the quantity stated in the terms of the contract. The overwhelming majority of futures contract holders have no intention of or interest in owning the physical underlying commodity. Instead, these holders sell their contracts in the secondary commodity futures market, or futures market, with the sole intent of making a profit. Profit, not the actual commodities, are the driving force in the futures market. For this reason, the futures market is a speculative market.
Warning
-
Commodities trading via the secondary futures market is considered extremely high risk and unsuitable for investors unfamiliar with the market. Moreover, it is important to bear in mind that unless a futures contract is sold in advance of the expiration date, the holding party will be responsible for receiving and storing a potentially large amount of an undesired commodity combined with the further obligation of paying for it.
-
