Commodity Market: Have you heard of those markets where you can buy, sell or trade any raw product? These natural products include gold, coffee, oil, and whatnot.
To simplify things, markets that involve commodity trading are referred to as commodity markets. You will find these commodities either hard, such as natural resources, or soft ones, including agricultural goods or livestock.
Through this blog, you will come to terms with the commodity markets’ ins and outs and their working, types, and features. Read on to be enlightened.
What is a commodity market?
The commodity market facilitates the exchange of physical goods in a country. Therefore, if you want to diversify your profile, you are open to investing in non-perishable and perishable items. This process reduces the risk factors and gives the player a hedge in opposition to the inflation rates in one economy.
What are the types of commodity markets?
There are multiple ways of dividing commodity markets, the first being hard and soft commodities. This is among the traditional ways of categorising commodity markets.
Hard commodities will include everything from precious metals like gold, silver, copper, platinum, and more to energy resources like natural gas, gasoline, and crude oil.
Regarding soft commodities, it includes agricultural goods like wheat, rice, salt, corn, coffee, soybeans, and more, along with livestock and meat – feeder cattle, live cattle, pork, and many more.
Basically, commodity trading can take place in two other ways: spot markets or derivative markets. Spot markets are the usual physical markets, also called cash markets. The buyer and seller exchange the physical commodities and get immediate delivery.
On the contrary, the derivatives market comes with forwards, options, and futures. Forwards and futures are derivative contracts using the spot markets just like their underlying asset.
Due to these contracts, the owner gains proper control of the underlying at a certain point in the coming time with a price that has been set today.
Upon the expiry of the contract, the product will be delivered. This is also why many traders close out or roll over the entire contacts to avoid making the delivery.
On this account, futures and forwards are typically the same things, just that forwards are more flexible and can be customised. On the contrary, futures are standard and set for one exchange only.
What is the working mechanism behind commodity markets?
If you are a producer or consumer of one of the commodities mentioned earlier, the commodity market is an excellent option.
This commodity market is a liquid and centralised marketplace with major roles played by speculators, arbitrageurs, and investors. Here, the actors will utilise the commodities derivatives to hedge future consumption in the production of the goods.
Some commodities like precious metals have been seen to have a better edge in front of inflation along with a broad range of commodities that utilise it as an optional asset class to diversify the profiles.
You will also find some people relying on the commodity market for the market volatility periods.
A practice that started aeons ago is back with a twist, and you will surely find to play with and also earn profits while you are at it. If you aim to have a fair play in the buying and selling of raw materials, then a commodity market is an excellent fit for you.
Author name: Steffy Alen