Commodities are a fundamental component of our daily lives, encompassing the items we eat, drink, and wear, as well as the raw materials that make up many other products we use. This broad category includes oats, cocoa, wool, coffee, cattle, cotton, as well as refined crude oil for gasoline and fertilizers for crops or copper used in wires. These are just a few examples of the many commodities available.
Futures Exchanges in the United States
Currently, there are two main futures exchanges in the United States: the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).
Chicago Mercantile Exchange (CME)
The Chicago Mercantile Exchange is the oldest exchange and is a result of a merger between the Chicago Mercantile Exchange and the Chicago Board of Trade. The CME has acquired the New York Mercantile Exchange (NYMEX), the New York Commodity Exchange (COMEX), and several smaller exchanges in recent years. The Chicago Exchange trades grains, cattle, lumber, metals, and energy markets.
Intercontinental Exchange (ICE)
The Intercontinental Exchange trades in energy markets, soft commodities, financial products, and equities, owning the New York Stock Exchange. The NYSE lists futures contracts on North American energy, metals, sugar, coffee, cocoa, cotton, and frozen orange juice. The Intercontinental Exchange has numerous other interests outside of the United States.
Commodities Traded on U.S. Exchanges
There are about 30 different commodities that can be traded on U.S. exchanges. Some, like wheat, have been actively traded for over 100 years. Others have nearly disappeared from the exchanges due to lacking sufficient trading interest.
The main commodities traded on U.S. exchanges include corn, soybeans, wheat, oats, rice, soybean oil, soybean meal, live cattle, feeder cattle, lean hogs, crude oil, heating oil, reformulated gasoline (RBOB), natural gas, ethanol, gold, silver, platinum, palladium, copper, cocoa, coffee, sugar, milk, cotton, orange juice, and lumber.
Commodities Traded in Foreign Countries
There are many other commodities not listed in the U.S. that are traded on exchanges around the world. Major exports of a particular country are traded on its national exchange to hedge or secure the price for future delivery. For example, the Tokyo Commodity Exchange offers many commodities such as lentils (red beans), which are a common ingredient in Japanese food.
Investing in Commodities
Investing in commodities requires expert knowledge of the commodity, including where to buy and sell it, in order to make it a worthwhile investment. If you wish to participate in commodity trading but lack the necessary background, you can still invest in assets that are dependent on this underlying market or related to it. Here are some ways:
Physical Trading
As the name suggests, physical commodities are purchased. Physical trading is not always practical for the average investor for several reasons. First, physical commodities must be bought wholesale. Second, they must be stored, which can require a lot of space. They may sometimes require special handling, such as ventilation or security measures. Finally, costs can be very high.
Futures Contracts
A futures contract is a promise to buy or sell at a specific price on a future date. When you buy futures contracts for commodities, you are essentially wagering that the value will move in your favor by the contract date, at which point you must buy or sell. Traders who understand the nuances of futures can take long and short positions by putting up a small amount of margin to control a large amount of the commodity.
Options
Options give you the right (but not the obligation) to sell or buy a commodity at a specified date for an agreed price. They are quite similar to futures contracts in that you can hedge a bet on the underlying commodity’s value at a certain time in the future (whether it moves in your favor or against it), but they carry less risk because you only hold the opportunity to buy or sell.
Funds
ETFs and ETNs
Exchange-traded funds (ETFs) can create funds that invest in commodities, and exchange-traded notes (ETNs) can do the same in the form of debt securities. Both aim to mimic the price movements of commodities and can be bought and sold like regular stocks. Commodity-focused ETF and ETN funds cover categories such as agriculture, energy, precious metals, and industrial metals.
Individual Stocks
You can also buy shares in a company that is currently mining, harvesting, or producing a specific commodity. The direct risk is not only in the product itself but also in the company’s performance. The price may not directly correspond to the price movements of the commodity it represents.
Conclusion
Although commodities are essentially tangible and familiar assets, the market that has developed around their value offers a complex and volatile way to invest. Due to a number of complex factors, they often move with price and demand. The state of the country’s economy or politics can influence prices. Storms or severe weather can destroy crops and affect supplies. Import and export laws of any given country can help or hinder these markets.
If you decide to invest in the commodities market, make sure you have a good understanding of the risks and potential strategies. After that, you can engage in several different ways.
Source: https://www.thebalancemoney.com/what-commodities-can-you-trade-809384
Leave a Reply