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What Is Commodity Market
A commodity market is a market where raw products are sold and bought. These raw products or commodities are usually traded on regulated commodity exchanges where they are sold and bought by way of standardized contracts. |
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If we look at the history of commodity market, we will realize that the modern commodity market rose from the ancient trading practices of agricultural products. In the United States, in the 19th century, commodities like cattle, pigs, and wheat were the usual commodities for trading using standard instruments. Foodstuffs like soybeans have been recently added on commodity markets.
Trading in a commodity market consists of trading forward contracts or futures contracts. Forward contracts refer to contractual agreement between two companies or individuals who agree to buy and/or sell any commodity between them. Futures contracts refer to a contract to buy and/or sell specific commodities between two companies or individuals in a recognized commodity exchange.
The Commodities Research Bureau Index is the most popular method of monitoring futures contracts. This index is made up of 17 commodities which are divided into sectors like grains, livestock, precious metals, industrials, softs and energy. The index was first created in 1957 and has undergone 9 revisions in its index components.
Around the world there are 48 major commodity exchanges that trade over 96 commodities between them and these can range from wheat to cotton to silver to oil.
Most commodity tradings are done by way of futures contracts and the two entities agree to deliver the commodities at specific period of time in the future but at the price agreed upon at the time of finalizing the contractual agreement. This price stands good even if the price of a particular commodity goes up or down. A futures contract protects both the parties involved from serious losses in a declining market and speculation for gain in a rising market.
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