How are Commodities Traded & Should You Buy Them?

Are Commodities like Sugar, Maize or Barley, Oil something for the Average Investor to Trade, or is there Too Much Risk Involved?.  The article includes a Podcast below.

What are Commodities?

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.

What is Commodities Spot Trading?

The participants in a commodities spot trade usually expect to receive immediate or near future delivery of the actual goods they have purchased.  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.

What are Commodities 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 to do business.

What are Futures Contracts?

As discussed earlier in the futures section, commodities can be traded as futures contracts 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.

Should I Invest In Commodities?

As an investor in commodities, you need to understand the supply and demand variables for that particular commodity.  A farmer will have more insight into the fluctuations of sugar or wheat, for example, that you will see as an average investor.  If you have a lot of specific industry insight, then it may be worthwhile.

Podcast 008 – Futures Markets, Who, What, and Why to be Careful.

Is the Futures Market something for you? Do you need to secure future prices today? Find out more.

• Duration: 00:06:02