If you’re new to trading or trading with commodities, then you’re in the right place. We will start by exploring the commodities market in general, and then move forward to specifically examine the commodities you can trade as a beginner trader. We will also explore what the futures are and how the futures markets have come into being in terms of their purpose.
Read on to learn more.
Commodity Futures Trading – An Overview
Examining the basic commodity futures exchange, we find that some of the contracts include agricultural products, metals, and energy. The agreement here is to buy and sell commodities by either delivering or taking delivery of the chosen commodity at a predefined future price and date.
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What Are Futures Exchanges
Commodity prices, as with all financial markets, are subject to fluctuations. Perhaps this aspect is an obvious point to make. The nature of commodities is that there is a change in price, which can, at times, be dramatic. For instance, if we look at agricultural products, the production of potential goods isn’t uniform throughout the year.
Various factors can influence the prices of products, which can cause the prices to soar or crash. These fluctuations are a problem for commodity producers. For instance, a farmer cannot predict what the price of the crops will be when it is ready. If the price is high, then it is great. However, if the price is low, then there is trouble.
The farmer has an inherent exposure to risk, which they want to pass on to someone else. This aspect is known as hedging.
How Does Hedging Work
Hedging incorporates futures contracts for effective risk mitigation. The goal of hedging is to protect themselves from bad price movements, which is why they lock in the prices for future commodity transactions, which provides stability and predictability. Futures contracts are used to establish a choice of the underlying commodity today, even if the intention of buying or selling is set for the future. Thus, hedging reduces uncertainty in financial performance.
What are Futures Contracts
Hedgers use futures contracts to effectively manage risk related to price fluctuations. Futures contracts are essentially standardized agreements to buy and sell commodities at a predefined price on a predefined date that is set in the future.
Future contracts are essentially traded on exchanges and are leveraged by both the speculators and the hedgers. Hedgers use futures contracts to effectively manage risks, whereas speculators aim to process profit from price fluctuations.
In commodity trading, futures contracts are essentially traded on exchanges, which means that the primary goal is to enable traders to manage risks related to price fluctuations and speculate on potential price movements.