Brief Overview of Commodity Trading

Commodities are simply products traded globally and daily. They can be categorised as hard goods (natural resources) or soft goods (agricultural products). Traders can speculate on prices on well-known exchanges like CME, NYMEX, and LME. Commodities serve as a hedge against inflation and a way to diversify portfolios. 

Understanding

Physical commodities trading refers to transporting valuable goods across international borders. While this type of trade can be challenging due to logistical issues, the WTO has helped improve efficiency. However, there are still challenges, such as transport shortages and fluctuating financing rates. To mitigate price volatility, new trading tactics like futures contracts have been introduced, offering flexibility and budgeting options for companies. The Chicago Board of Trading (CBOT) has significantly established standardised agricultural trading in the US.

Pricing 

These assets are traded using futures contracts on exchanges. These contracts ensure that the quantity and quality of the traded product are standardised. Traders can be either buyers or sellers. They use futures contracts as a way to hedge against potential risks. Additionally, some speculators trade in commodities to profit from price changes. Futures markets for this asset class are known for being liquid and volatile, which makes them attractive for intraday traders. Index futures are another type of futures contract that can reduce risk and diversify investment portfolios.

Commodity prices are affected by supply and demand, and a strong economy increases the demand for energies. Factors such as economic shocks, natural disasters, and investor interest can influence supply and demand.

Bottom Line

Commodities are goods used in trade and manufacturing. They are natural resources used to make finished items, while products are the items sold to customers. It is a unique asset class and can be valuable in a diversified portfolio.