Commodities can be defined as any good or service that is bought and sold based solely on supply and demand. They can also include products that cannot be differentiated from others based on brand or unique features. Think of things like corn, grains, livestock, metals or oil.
Commodities are traded as futures contracts on exchanges. Futures contracts are a legal promise to buy or sell something, in this case a commodity, at certain price on a certain date. Buyers and sellers are essentially locking in a price for a particular commodity and in order to protect themselves from future price hikes. For example, airlines often buy fuel contracts in advance to potentially avoid paying more money later on.
The largest and most famous commodities market is the Chicago Mercantile Exchange. The Chicago Board of Trade (CBOT) created the first futures exchange in 1848. The Chicago Mercantile Exchange (CME) was started in 1898 as the Chicago Butter and Egg Board. The two exchanges merged and became the CME group in 2007, and in 2008, acquired the New York Mercantile Exchange.
Not for the faint at heart
The commodities futures markets enable producers like oil drillers or farmers to hedge prices. In other words, before they drill a hole or plant a seed, they can lock in a market price by selling a futures contract. On the other side of that contract are the speculators. In other words, traders and investors can speculate on future price swings by taking the other side of the hedger’s position.
Almost every investment carries risk and commodities are no exception. Commodities markets can be volatile, with wildly fluctuating prices. While some investors are able to make money off that volatility, there is a risk of losing money on a bad bet. Before trying to enter the market, be sure to research commodities trading and learn more about the risks involved with trading.
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