Commodity

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Commodity

A raw or unprocessed material that can be bought or sold and is used to make something else that eventually is consumed is called a commodity.
Commodities are used as materials in the production of goods or services.
A commodity is a physical asset and has a monetary value as well.
Commodity examples include those that obtained from the ground and those that have to be dug up deep underground.
Typical commodities include:

“Energy” (crude oil, gasoline, heating oil, natural gas)
“Metals” (gold, silver, copper, platinum, palladium)
“Softs” (cocoa, coffee, cotton, orange juice, sugar)
“Grains and Oilseeds” (corn, soybeans, soybean meal, soybean oil, wheat)
“Livestock / Meats” (feeder cattle, live cattle, lean hogs)
“Other” (lumber, dairy products)

Crude oil is currently the world’s most actively traded.
Commodities are traded on an exchange.
The main three global commodities markets are the:

CME Group (formed from the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade)
Intercontinental Exchange
London Metal Exchange

For trading purposes, a given commodity typically is interchangeable.
One barrel of oil is considered the same as any other.
To be traded on the markets, a commodity must be interchangeable with another commodity of the same type and grade.
That means that to a trader, gold is gold: no matter where it was mined or which company mined it.
The term for this quality in commodities is fungible.
They are split into two varieties:

Hard commodities are metals or energy resources, mined or extracted from natural resources. Soft commodities are agricultural, farmed, or grown.
Soft commodities tend to be seasonal, and prone to spoilage.

The buying and selling of commodities for profit are known as commodities trading.
Commodities trading are a split into two types:

The spot market
The futures market

The Spot market is for the commodities which are to be delivered soon while the futures market is for the commodities which are set to be delivered in future.
In most cases, the commodities traders do not want to deliver their commodities due to which the future contracts get closed before delivery date.
The most commodities are associated with a specific local exchange, so the future contracts trading depend upon the future exchanges.

Who Trades Commodities?

There are two major types of commodity market participants:

Hedgers (aka “commercials”). These are businesses that are actually producing, shipping, processing, or otherwise handling the commodities in question. They include oil and gas producers and refiners, miners, grain millers, farmers, and meatpackers.
Speculators. These include banks, hedge funds, and individuals who trade commodities. They speculate that the price of a commodity will go up or down within a certain time frame, and they place trades with the aim of turning a profit.

How Do You Trade in Commodities?

There are many ways for individual traders for the commodities markets without raising own pigs
These include:

Futures contracts. An agreement to buy or sell a certain amount of a commodity at a certain price in the future is called futures contract. If a futures contract has increasing price, there will be profit for buyer; on the other hand, the price is decreasing the seller will get profit (this is known as going short). In futures markets for retail traders, actual “delivery” of a commodity is rarely allowed; usually, contracts are “closed out” prior to expiration.
Options on futures. Put or call options based on crude or gold, for example, are traded on many futures exchanges. Holder has the right in this contract, but not the obligation, to buy or sell a specific futures contract at a specific price on or before an expiration date.
Exchange-traded funds (ETFs). ETFs are marketable securities that trade like common stocks and can be bought or sold on an exchange. Many ETFs are linked to a single commodity, a basket of commodities, or a commodity index.
Traditional stocks. Many publicly traded companies have direct exposure to commodities and commodity markets (miners, oilseed processors, and oil and gas exploration companies, for example) or indirect exposure (such as farm equipment manufacturers).

On spot commodities are not bought or sold only but can be paid immediately
The Forward Contracts enables the products which can be sold or bought at a fixed price for delivery at a particular future time
And there are also ‘options’ and ‘futures’. A party can also avail an option to buy or sell at a future time but not the obligation to do so. Futures are similar but parties have to deliver a commodity or pay for it.
It is easy to see that options and futures are like bets on the future price of an item on which they are built. As a result, they can be used for hedging "real" trades. For example, an airline may purchase a forward contract or select an option or future to lock the future price of its fuel.
But there are also opportunities to speculate on commodity derivatives - buying or selling with the belief that a change in price would be profitable. Better (or safer) if you can hedge your bet using an option or future.
You can buy and sell shares in ETFs, which are backed by physical commodities, just like any shares.
Private investors can gain access to commodities markets by investing in funds that in turn invest in commodities.
An increasingly popular type of commodity investment is the stock market listed exchange traded funds (ETFs).
You can buy and sell shares in ETFs, which have the same physical commodities as any other stock.
The charges levied by ETFs managers are less than other investment funds, and the process of buying or selling them is much faster and easier.

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