what is commodity market?

Commodity market is the market where various commodities are traded. It basically refers to the physical trade of commodities, but can also refer to futures contracts, options contracts and derivatives which are actively traded on an exchange. 

How it work?

The price of a commodity is set by its demand and supply. In these markets, the global prices are determined through bidding among various investors who trade on a commodities futures exchange such as New York Mercantile Exchange (NYMEX), Dubai Gold & Commodities Exchange (DGCX), London Metal Exchange, Intercontinental Exchange – COMEX Division, New York Board of Trade (NYBOT), etc.

What are possible categories of commodities?

The most common type of commodity is a physical good that’s readily available on the market. These include forest products, precious metals, agricultural goods and livestock, oil, natural gas; other energy sources like wind or solar power follow suit since they can be turned into commodities. Other typical items traded are futures contracts, forward contracts or options on a commodity.

How to understand the market price of a commodity?

The price of a commodity is determined by the forces of demand and supply which are affected by various factors including weather conditions, economic performance, technological breakthroughs, shortage of supplies etc. In other words, when there is a high demand for a commodity or when there are several buyers in the market, the price will rise. And vice versa.

What are advantages of trading in commodities?

Trading in commodities have many benefits including low transaction costs, diversification and tradeable 24/5 globally. What’s more, commodities often favor long-term investment since such markets tend to be very stable (especially in comparison with stocks and bonds).

What are risks of commodity market?

The main risk in this type of trading is that prices can be driven down due to a surge in production or if the industry becomes oversupplied. The lack of awareness about commodities or lack of knowledge/information can also prove problematic.

How to access commodity market?

To invest in this type of trading, individuals have the option of purchasing shares in a company that engages in commodity production or they can trade directly through an online broker that specializes in commodities. Another option is to invest via exchange-traded funds that are related to commodities.

So the next time you hear about a commodity trading, think about these two words – “commodity market”. We hope this article was able to answer your pertinent question of what is commodity market and how it works! Stay tuned for more updates on our future articles!