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What is a Commodity Trade?

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  • Written By: James Corey
  • Edited By: C. Wilborn
  • Last Modified Date: 24 May 2018
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A commodity trade is a financial transaction involving the exchange of a raw or primary product between a seller and a buyer at an agreed price. Commonly traded commodities are agricultural products, including items like cattle, sugar, and wheat; petroleum products, including either crude oil or refined products; and precious and basic metals. Commodity trades are mostly conducted on regulated exchanges.

Exchanges define highly standardized contracts designed to facilitate trading. They also enforce a margin system, which requires participants to maintain a defined level of financial reserves in order to promote the performance of the trade and, more broadly, protect the overall integrity of the market. Exchanges act as a clearing house to guarantee the performance of all trades in the event that either the buyer or seller fails to comply with the contract. Commodity markets are global in nature, with price movements in the price of a commodity on one exchange being rapidly reflected in all other exchanges for that same commodity around the world.

Even though various forms of a commodity trade can be traced back many centuries to ancient times, modern commodities trading can began with the trading of agricultural products in the United States during the 19th century. Indeed, modern organized commodity trading is widely considered to have started with the opening of the Chicago Board of Trade (CBOT) in 1848. Futures contracts involving agricultural products began to be traded on CBOT by the 1860s.

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A commodity trade may be conducted in either a spot, or physical, market or a derivatives market. Over recent years, the growth of commodity trades involving derivative instruments, or securities, has far outpaced that of spot transactions. Derivative securities include forward contacts futures contracts and options. Generally speaking, most commodity trading is based on derivatives, particularly futures contracts.

In participating in a commodity trade, the purpose of the buyer and seller may be to either assume risk — speculate — or to transfer — hedge — risk. A commodity trade may reflect both the buyer and the seller seeking to speculate or to hedge, depending on their respective views of the future. It is impossible to determine whether a trader’s purpose in conducting a commodity trade is to speculate or hedge. That depends critically on the trader’s opening financial position which is a private matter not normally visible to or known by anyone other than the trader.

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Discuss this Article

andee
Post 3

One commodity I always keep an eye on, whether I am actively trading it or not, is the price of oil. No matter what season of the year it is, this can affect so many things. If you are wanting to learn how to trade commodities, I would find a trustworthy program to follow.

Even though it is easy to get impatient, I would recommend paper trading for at least 3 months before investing your hard earned money. This will give you a good idea of how volatile these markets are and how quickly they can change.

sunshined
Post 2

I have traded commodities for years, and always seemed to find a niche with the gold commodity trading. It seems like many things world wide are somehow tied to the gold market, and it can make for a wild ride sometimes. There are so many commodity trading strategies out there, so you need to find what works for you and stay consistent with that.

If you are constantly trying the newest program it will be much harder to find success. Have a plan and make sure you trade that plan.

golf07
Post 1

I had traded stocks for several years, and always enjoyed knowing what was going on in the market. I had some success and was interested in commodities trading online. I always liked listening to the farm reports and hear what the prices of agricultural products were.

I knew that commodity trading was not without risk and thought I would have the same success. The commodities market can be very volatile and change very quickly as I soon found out. If you are interested in trading commodities, it would be well worth your time to do your research and make sure you keep up to date on the markets.

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