How are Commodities traded?

Commodities were traditionally physical goods or raw materials such as sugar, maize, barley, pork bellies, milk, cocoa, cotton, gold, silver or copper.  However, the commodities exchanges have expanded to encompass more modern items such as, Energy and even RAM chips for computers.

In the commodities market there are different types of transactions.

Spot Trading

The participants in a commodities spot trade usually expect to receive immediate or near future delivery of the actual goods they have purchase.  This is a way for the corn farmer to find a buyer for his corn on the open market.  Spot trading because of the short delivery time will usually take place in a wholesale market and allow the buyer to inspect the goods.

Forward Contracts

A forward contract is the agreement to exchange the goods at a specified time in the future for a price that is agreed upon today.  This protects the corn farmer from falling prices and the corn oil producer from rising prices.  This minimizes the risk for both parties of doing business.

Futures Contracts

As discussed earlier in the futures section, commodities can be traded as futures contract meaning that the buyer and seller of the contract to not necessarily expect to actually receive delivery of the commodities they have purchased they simply receive the cash equivalent.

In the U.S. the regulating body for the commodities exchanges is called the Commodities Futures Trading Commission.

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