Essential Knowledge: Commodity Trading – Futures Market – Spot Market
Commodity trading market has first-class history going every part of the way back to the mid 1800s. INDUSTRIAL REVOLUTION bring fresh technologies and abilities to manufacture new resourceful tools and consequently additional food. Economic output begin to out-pace residents enlargement, our country developed a must for more well-organized agricultural storage, transportation and distribution of goods.
As the capacity of goods greater than before exponentially, FUTURES MARKET amid constantly standardized commodity pricing, grading and delivery became an complete requirement in order to deal with the seasonal gluts occurring just after harvest and sharp shortages occurring before harvest. Farmers and investors could now protect themselves from price rise and falls by locking in exact prices for commodities time-consuming earlier than essentially needing to receive physical delivery of them. So the FUTURES MARKET and COMMODITY TRADING was born.
What is Commodity market?
“A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market. It is fungible, i.e. the same no matter who produces it. Examples are petroleum, notebook paper, milk or copper…”
Specific items values to be well thought-out a COMMODITY and be traded in a futures market. A commodity must be STANDARDIZED. So whether we are discussion about a barrel of oil, a bushel of wheat, a ton of iron ore or a particular importance of foreign currency, commodities have a standardized and set value. This is exactly why such items as art or jewelry is not considered a commodity. Each piece is definitely one of a kind and totally single unto itself. Therefore the value differs and fluctuates massively from one part to one more.
About spot market
Spot markets is futures in commodities. In spot markets, commodities are traded directly in exchange for cash or some other good. In contract, buy or sell the commodity in the FUTURE for by a certain price.
As the largest part commodity trading is finished in the form of futures and options, there is a big quantity of speculation drawn in making perfect predictions with regards to the ultimate values of items being traded. This naturally creates near limitless speculative uncertainty, with massive potential for profitability as well as the risk of overwhelming failure.
Such speculation is an wonderfully difficult course of factoring in as much touchable information as likely to make what one hopes to be a reasonably rational prediction, based on analysis of current conditions. For example, speculation on wheat options would take into account the total amount of acreage that has been planted, both the organic and mineral condition of the soil, moisture levels in the soil and atmosphere, as well as best “guesstimates” regarding weather condition for the coming months.
As if that’s not enough to try to calculate, what if there is a cataclysmic flood or fire, what if there is a transportation strike or political upheaval, what if drastic change in the marketability of a crop, such as a perceived medical emergency and ban placed on a particular commodity? In other words, no one can feel absolutely 100% certain about the future price of a particular commodity, which is precisely why they call it “speculation.”
Think of commodity futures as being much like a wholesale market, where transactions are done in large bulk. So while you may go to the grocery store to buy a pound of sugar, in the commodity futures market, investors are buying 400,000 pounds! Instead of filling his gas tank with an average of 20 gallons of gasoline, a commodities trader is purchasing more along the lines of 100,000 gallons. Another big difference for you to keep in mind is that while you expect the go home with your bag of sugar and gas gauge on full, the commodity trader never actually expects to see a single grain of sugar or a drop of gasoline. That’s because their purchase is “the contract” for the goods, which might be bought and sold a number of times before the goods are ever even manufactured and delivered.
Who can make sky-high profits in commodities market?
Truly understand work process from points of all and complete confidence in their advisors “burning tips” or probably a impressively trustworthy “extra-sensory destroy by fire insight”
So it’s wise to go into the trade knowing that there is a definite reason they refer to this as “speculation,” so be smart about how much you invest and where you invest it, keeping your goals and time-lines in mind when calculating the risk that you can afford to place yourself in, hoping to beat the odds and strike it rich with a few well placed orders.