Commodities are raw materials or physical goods that can be bought and sold. Commodities markets can broadly be classified into the following groups:
Commodities markets trade in raw or primary goods that can be bought and sold on the commodities exchanges. They deal in commodities that are of a specified grade.
From wheat to oil and gold to sugar, the Commodities markets open up a vista of investment options, both short-range and long-range.
Since the Commodities markets is both very dynamic and vital to global trading, it is the perfect resource for crucial market information and performance pointers.
Commodities markets transactions permit not only trading of physical commodities but also the right to sell goods. Hence, the bulk of dealings in a Commodities markets involve the buying and selling of futures contracts.
The futures market is a major focal point for traders from the world over to enter into Commodities futures contracts. Futures contracts are agreements to buy or sell particular commodities at a stated price and at a future delivery date.
For instance, a farmer growing sugarcane may be seeking to get a reasonable selling price for his crop, which will be harvested several months later. At the same time, a soft drinks manufacturer may be looking out for a good buying price to find out how many bottles can be manufactured and what would be the returns. Therefore, the farmer and the soft drinks manufacturer may take part in a futures contract entailing the delivery of a specified quantity of sugar to the buyer by a particular date and at a pre-decided price. As a result of entering into such an agreement, the farmer and the soft drinks manufacturer settle on a price that they think would be a fair price on the future delivery date.
In a Commodities contract, everything is clearly mentioned: the amount and quality of the Commodities, the exact price per unit, and the time and mode of delivery.
The gains and losses of a contracts futures are governed by the daily market activity for that contract and are computed on a daily basis. For instance, if the futures contracts for sugar increases by a $1 per unit in a couple of days after the agreement entered into by the above farmer and soft drinks manufacturer, the farmer has lost $1 per unit since the selling price has gone up from the future price at which he is compelled to sell his sugar. The soft drinks manufacturer has gained by $1 per unit since the price he is required to pay is below the future market price for sugar.
The regular manner in which to check futures contracts for the Commodities markets is through the Commodities Research Bureau ("CRB") Index - the most extensively pursued basket of commodities throughout the world. The Index is composed of 17 commodities that are assigned equal weights.
Options on future contracts are agreements to buy or sell commodities at a fixed price and with deferred delivery. They safeguard against unpredictable price variations and help reduce the risk of loss. The principal benefit of buying options on futures is that it enables the investor to make a profit from positive price shifts and minimizes his risk to the amount paid for the option plus transaction charges. For instance, if an investor has paid $750 for an option (all-inclusive), then his risk or loss is limited to that amount. Financial options are an attractive alternative to those who wish to invest modest amounts or undertake less risk.
Spot markets are markets in which a Commodities is bought or sold for cash and delivery is immediate. Contracts that are bought and sold on these markets are instantly operative.
Commodities markets are the trading centers of various commodities that play a major role in the global economic scenario. With a rapid spurt in investments in commodities over the past few years, it is all the more imperative that Commodities markets are regulated in such a manner that they facilitate increased investment and help uphold investor confidence levels.
This line of approach will lead to the further development and growth of these markets. Commodities markets will encounter a lot of challenges in the days ahead, but with the right support and systems in place, the markets can reduce the threats to market confidence and accept the new and wide-ranging entrants to this market.