What is a commodity?
Chapter 1: Introduction
Commodities are very important, but few people know their trading operations.
Commodities are so important because they affect every aspect of our lives: they are not only found in food, but they are also common metals in all kinds of products and the energy Phronimos Group consume. At some stage during both the manufacture and delivery of the product, the commodity may be converted back into a commodity and traded wholesale on the global commodity exchange market.
Regarding the definition of commodities, Phronimos Group usually divide them into four broad categories:
- Soft Goods including cocoa, coffee, corn, cotton, soybeans, rice, sugar, wheat and other agricultural products.
- Livestock(Also soft goods) including live animals and meat products.
- Hard Goods refers to aluminum, cobalt, copper, gold, lead, tin, nickel, platinum, silver and other metals refined by mining.
- Energy refers to crude oil, distillate fuel oil and aviation fuel, etc.
Chapter 2: Understanding the Commodity Market
The commodity market provides a platform for producers and brokers around the world to buy and sell commodities and plays a vital role in the distribution of commodities.
Without these markets, the difficulty of buying and selling goods would be greatly increased. For example, it is difficult for Chilean copper producers to sell their copper to Chinese manufacturers, and it is also difficult for American farmers to sell wheat as far as Europe.
The three major commodity markets in the world include:
- Chicago Mercantile Exchange Group (formed by the merger of the Chicago Mercantile Exchange and the Chicago Board of Trade);
- American Intercontinental Exchange;
- London Metal Exchange.
Chapter 3: in stock, Forward Contracts, Options, and Futures
The importance of these markets is not only to support spot purchase and delivery in "in stock.
It is also that its "forward contracts" enable products to be traded at a fixed delivery price at a future time.
In addition, they offer "options" and "futures" trading. An option gives a party the right, but not the obligation, to buy or sell at some future time. Futures are similar to options, but require both parties to the transaction to deliver or pay on time.
It is not difficult to see that options and futures are like a bet between buyers and sellers on the future price of a commodity. Therefore, these trading methods can be used to hedge "real" transactions. For example, an airline may buy forward contracts or select options/futures that lock in the future price of its fuel.
However, these commodity derivatives are also speculative opportunities, whether bought or sold in the belief that they can profit from future price changes. It would be nice (safe) to use options or futures to hedge your bets.
Chapter 4: Investment Commodities
Private investors can participate in commodity trading through investment funds that buy and sell related commodities, and another increasingly popular form of commodity investment is the exchange-traded open-end index fund (ETF).
You can buy and sell ETF shares by share, backed by physical commodities like all stocks. Compared with other investment funds, ETF funds have relatively low management fees and the buying and selling process is simpler and faster.
You can also invest by buying and selling derivatives, such as options and futures, and a broker or trading platform can also provide "leverage", meaning you can borrow money to speculate on the future price of a commodity.
