In the world of trading, commodities fall under the category of an asset for trading purposes. Commodities are described as raw material and resources. Commodities are mainly divided into the two broad categories i.e. Soft and hard commodities. Soft commodities that include agricultural, farmed or grown products like wheat, cotton, and sugar while the hard commodities include metals, minerals & mines products or products that are extracted from natural resources i.e. gold, silver, crude oil and natural gas etc. Commodities are generally traded in heavy volume of quantities.
A trading commodity should have the following characteristic;
- It should be standardized
- It must be utilizable at the time of delivery.
- The price of the product is subject to fluctuation in order to create the market for the product.
However, foreign currencies and other financial instruments are also trading in the commodity market and form the part of the commodities.
The commodities are traded in the exchange, over the counter market and future exchange markets. New York Mercantile Exchange is one of the biggest commodity exchanges. Gold, Crude Oil, wheat, and silver is the most commonly traded commodities of the market. Commodity exchange markets do not fix the rates of the commodities that are traded while the demand and supply forces of the commodities are set the prices of the market. On the trading platform buyers and sellers put their bids and offer prices in relation to a commodity and when the parties execute the trading transaction in respect of the underlying commodity. The price of the transaction that is recorded on the trading floor is disseminated or announced for the public. That announced price come into being the current trading rate of the subject commodity.
The commodities are traded in the spot market as well as in the future or forward markets. Spot market also termed as cash or physical market where the trading transactions are taking place by using the spot or current rate with instant delivery of the asset or commodity. In future markets, the trading transaction was executed for future delivery by using the future or forward rates that usually quoted at premium or discount with respect to the spot rate.
Generally, the large companies and Investment funds are the main market player of the commodity markets. However, with the help of internet and online brokerage services individual traders and investors are taking the part in the trading of the commodities. Commodities are mostly traded in the future market for speculative purposed in order to make the profit through price fluctuations rather than taking the actual delivery of the commodities. Commodities are also traded with options that mean commodities can also be backed with utilizing the hedging techniques.
Commodity trading is an attractive and complicated type of investment asset. The commodity trading is very similar to the trading of the stocks and other financial instruments and involved the risk associated with each trade.