Commodities
The financial term commodity is defined as a physical substance, such as food, grains, a and metals, which is interchangeable with other product of the same type, and which investors buy or sell, usually through future contracts. Or more generally, a product which trades on a commodity exchange; this would also include foreign currencies and financial instruments and indexes. When one speaks of a commodity, they can be referring to two types of this aspect of finance. A cash commodity or an actual is an actual physical commodity which is delivered at the completion of a "contract" This is the lesser utilized of commodities.(Investors Glossary) The more predominant type of commodity that is used is the commodity futures contract. The futures markets are described as continuous auction markets and exchanges providing the latest information about supply and demand with respect to individual commodities, financial instruments, and currencies. Futures exchanges are where buyers and sellers of an expanding list of commodities, financial instruments, and currencies, come together to trade.(Investors Glossary) The primary purpose of futures markets, is to provide an efficient and effective mechanism to manage price risk. The
One may ask themselves, what was the basis for this practice of the trading of futures and commodities. Before there were organized grain and commodity markets, farmers would bring their harvested crops to major population centers. There they would search for buyers. There were no storage facilities; and many times the harvest would rot before buyers were found. Also, because many farmers would bring their crops to market at the same time, the price of the crops or commodities would be driven down. There was tremendous supply in relation to demand. The reverse was true in the spring. Many times there would be a shortage of crops and commodities and the price would rise sharply. There was no organized or central marketplace where competitive bidding could take place.(EH.Net) The first type of agricultural contract is the grains. This group includes corn, oats, and wheat. The second type of agricultural contract is the oils and meal. This group includes soybeans, soymeal, soyoil, sunflower seed oil, and sunflower seed. The third group of agricultural commodities is livestock. This group includes live hogs, cattle, and pork bellies. The fourth type of agricultural commodities is the forest products group. This group includes lumber and plywood. The fifth group of agricultural commodities is textiles. This group includes cotton. The last type of agricultural commodity is foodstuffs. This group includes cocoa, coffee, orange juice, rice, and sugar. Today, there are futures on most major indexes. The S&P 500, New York Stock Exchange Composite, New York Stock Exchange Utilities Index, Commodities Research Bureau (CRB), Russell 2000, S&P 400 Midcap, Value Line, and the FT-Se 100 Index (London). Stock index futures are settled in cash. There is no actual delivery of a good. The only possibility for the trader to settle his positions is to buy or sell an offsetting position or in cash at expiration. Almost every month a new type of contract appears to meet the needs of a continuously growing corporate and institutional market.(CNN Financial) futures market allows buyers and sellers to stabilize the price of something. Individuals and businesses seek to achieve insurance agains
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