The current commodity exchange you see today has been originated in the ancient agricultural community. The commodity market gave the opportunity to sellers and buyers a supervised and convenient trading arena. Later on, the contracts for sale in future was replaced with cash for the actual goods.
Now in recent years, as the raw materials demand is increasing in all the developing countries, it has spurred an interest in considering commodities as an investment. Similarly, even the trading of currencies and cryptocurrencies too is gaining wide popularity. Learn more about it here.
Goods and markets
The commodities market consists of all kinds of raw materials. Apart from traditional products like cattle and grain, it also deals with coffee, oil, gasoline, metals, etc. Various markets around the world facilitate the selling and buying of these types of materials.
In the modern commodities market, producer or the farmer enters into an agreement with the buyer to sell his product at a particular time in future for a set price. This agreement is known as a futures contract that helps in protecting against the changes of price. For instance, if the farmer decides the wheat price six months in advance, he would surely get that price while selling even if a bumper harvest had made the price go down.
Commodities as investments
The commodities are volatile which means the prices of the commodities experiences quite wide swings. Hence the commodity futures come under high-risk investments. Even though the investors in commodities earn huge returns at the time, they can also even suffer huge losses. The commodities help in hedging against the inflation, wars and other major crisis. Also, they help in hedging the bonds and stocks losses as they move usually in opposite direction to such investments. The investors need not have to directly speculate in commodities by conducting trading in actual futures. They can also choose indirect alternatives like commodity funds.
Traders or speculators buy the future contracts often hoping that they could resell them before the delivery date at profit. They will act as the intermediary between the end users and farmers or producers. For instance, the trader buys the wheat with a 6-month contract. If at all the wheat price goes up during that period, the trader resells that contract to the bread maker to make a profit. If at all the wheat price comes down, then the trader has to sell it at a loss as the trader will be having no use with wheat.