Forex news Oct 04, 2024

What can be Traded in a Commodities Market?

A commodity market is where raw materials are bought and sold. We explore one of the oldest forms of financial trading.

An image with different types of grains in sacs

A commodity market is a physical or virtual marketplace for buying, selling, and trading the raw materials used to manufacture goods. Commodities are usually divided into two categories: hard commodities and soft commodities. Hard commodities include natural resources that must be mined or extracted, such as gold, oil, and iron ore, while soft commodities are agricultural products or livestock, such as wheat, coffee, and cattle.

The different types of commodity market

Commodity markets are classified by the nature of the commodities traded, such as:

1. Physical markets

In physical markets, the actual goods are traded and delivered, such as grain markets or livestock auctions, where buyers and sellers negotiate directly.

2. Futures markets

Futures markets involve contracts to buy or sell a commodity at a predetermined price at a set time in the future. These contracts are standardized and traded on exchanges like the Chicago Mercantile Exchange (CME). Futures markets underpin price discovery and risk management.

3. Spot markets

Spot markets, also known as cash markets, involve the immediate settlement of transactions at the current market price. These markets are essential for commodities that need to be delivered and consumed promptly.

4. Options markets

Options markets provide the right, but not the obligation, to buy or sell a commodity at a specific price before a certain date. Options offer traders flexibility and are often used for hedging or speculative purposes.

What materials are usually traded from each commodity sector?

Energy commodities

Crude oil: The most traded energy commodity, with benchmarks like Brent Crude and West Texas Intermediate (WTI).
Natural gas: Widely used for heating and electricity generation.
Coal: Still a significant energy source for power plants globally.

Agricultural commodities

Wheat, corn, and rice: Staple grains essential for global food supply.
Coffee, cocoa, and sugar: Popular soft commodities with substantial global demand.
Soybeans and cotton: Key crops for food production and the textile industry.

An image showing coffee beans from different countries

Metal commodities

Gold and silver: Precious metals used for investment and industrial purposes.
Copper and aluminum: Industrial metals crucial for manufacturing and construction.

Livestock and meat commodities

Live cattle and lean hogs: Important for the meat industry.
Feeder cattle and pork bellies: Traded for meat production and consumption.

Fund your trading account online with Skrill

History of Commodities Trading

Commodities trading dates to ancient civilizations. Early markets facilitated the exchange of essential goods like grains, spices, and metals. The modern concept of futures trading began in the 17th century in Japan with the rice futures market. In the 19th century, the establishment of organized exchanges like the Chicago Board of Trade (CBOT) formalized futures trading, providing standardized contracts and greater market transparency.

Commodity Market Requirements

Trading in commodity markets requires a few fundamental elements:

Standardization
Commodities are standardized to ensure uniformity in quality and quantity. Doing so allows for fair trading and pricing.

Person looking at a monitor screen and analyzing data

Market Access
Traders need access to commodity exchanges and electronic trading platforms. This access can be through brokers or trading firms.
Risk Management Tools
Instruments like futures, options, and swaps help manage price volatility and market risks.
Regulatory Compliance
Commodity markets are subject to regulation to ensure transparency, prevent fraud, and protect market participants. Regulatory bodies like the Commodity Futures Trading Commission (CFTC) in the United States oversee these markets.

Commodity markets: A crucial part of the world’s economy

Commodity markets play a vital role in the global economy, facilitating the trade of essential raw materials. From physical and futures markets to spot and options markets, a variety of platforms exist to meet the needs of different traders.

With a rich history and stringent requirements, commodities trading remains a cornerstone of economic stability and growth, providing opportunities for hedging, speculation, and investment. As the world evolves, these markets will continue to adapt, ensuring the seamless exchange of goods that underpin daily life and industrial activities.

Open a Skrill account

Person opening the Skrill mobile app on their phone

The information provided on this blog is for general informational purposes only and is not intended to constitute professional financial advice.

This article contains information about forex and trading; however this article and content does not constitute "advice", nor does it constitute any "recommendation" on whether or how to engage in forex and trading. The information contained in this article should not be relied on for any financial or other transaction.
Further, neither Skrill Ltd. nor any of its Affiliates, endorses or makes any warranties regarding the accuracy or reliability of any opinion, information, or statement provided throughout this article. All forex and trading content contained on or made available in this article is for educational informational, and/or advertising purposes only. Neither Skrill nor any of its Affiliates are licensed financial advisors and do not hold any licenses to provide trading or investment advice.

Skrill Ltd. does not endorse or promote any form of forex and trading. Please note that all forms of forex and trading (online and otherwise) carry with them inherent financial risk and risk of financial loss. Any forex and trading activities should be exercised with responsibility and moderation in compliance with all applicable laws and regulations.