Definition Of Commodities Market
A commodity market is a commodity exchange that is regulated by the state to allow sellers and buyers to trade in specified commodities like grains, oils, metals and livestock. The exchanges enable traders to formalize written standard contracts in a manner that the buyer need not inspect a specimen of the commodity before making a purchase. Though there are a large variety of contracts which the purchasers and vendor may have, the two that are practices most frequently are the futures, meaning pay now to get in future and on the spot deal. Though it’s not as popular as the stock market, commodities market also provides opportunities of making profit to its investors
A commodity is best described as any raw material or a basic material that is needed for manufacturing other products. So, all metals, minerals and foodstuffs are categorized as commodities. Commodities can principally be divided among two categories: agricultural and industrial. Agricultural commodities include grains, such as corn, rice and soybeans etc. Grains are produced in abundance and can be stored for long time. So, their trading is more flexible to fulfill market demand. Industrial commodities include raw materials needed by manufacturing industries. Industrial commodities include oil, gasoline, metals and coal etc.
Price is decided by market movement all together, with hardly any qualitative discrimination. For instance, diamonds are traded as diamonds, irrespective of their origin, and quality is mainly defined by grades, which are classified into two, industrial and jewelry without any consideration to the place of their origin.
Purchasers and suppliers meet at the commodity exchange and trade contracts. Contract means a promise to pay money for specified commodities received at a particular time. The five biggest exchanges are the New York Mercantile Exchange, NYSE Euronext, the Tokyo Commodity Exchange, Multi Commodity Exchange and Dalian Commodity Exchange.
Commodity Futures Trading Commission is the regulator of commodity markets in the US. All exchanges have regulatory boards that frame the rules and set standards to ensure that the buyers get commodities as per the contract without any need to inspect the same.
Commonality trading markets offer two kinds of contracts, futures and spot. Spot transaction refers to the transaction that takes place on the spot, meaning prices are negotiated and money paid for commodity without delay. Futures contract is said to take place when a purchaser makes payment to the seller as per price agreed on the date of the contract to offer goods at date specified in future. Futures contracts enable trades to secure low price for ensured delivery of necessary items, thus circumventing crop failures or any connected problems.
It’s interesting to mention here that elementary commodity markets materialized since the time of Sumer. At that time merchants would give clay vessels having many slips (most often of sheep) within which guaranteed handing over of the actual commodity at a future date.