Knowing About Commodity Futures Trading
Commodity futures trading is a type of investment where one can make money by speculating on the price of a certain commodity going up or down in the future. Commodities are usually the essential things that people make use of everyday. Most of the times, these commodities are the basic essentials needed by a modern society.
When talking about certain commodities being traded in the futures market, it must meet certain conditions to make it allowable for trading. One of the conditions is that the commodity should be standardized. In trading agricultural and industrial commodities, the traded commodity should be in its basic raw and unprocessed state. In this case, Wheat may be traded in the futures market but not flour.
Another condition a certain commodity has to meet is that the perishable kind should have sufficient storability. The explanation for this is that these commodities are traded with their delivery booked deferred at a future time. There may need a long life so the commodities might be delivered with its quality still good and untouched. Another condition a certain commodity should meet is that it ought to have an amount that changes regularly, making some doubt as well as opportunity to profit.
The history behind futures trading in commodities evolved from the farmer's need to earn more from every harvest. Before commodity futures trading started, the farmers were always at the mercy of the dealer when it comes to pricing and selling their harvests. Dealers usually set the prices and the farmers cannot to anything but accept the terms. In a way the farmers were being exploited by some dealers and so another form of selling their harvest.
In the search for having a more fair system of doing business, farmers began offering future harvest to interested buyers. The farmers started giving their own terms for the future harvests to dealers. The transaction consists of commodities offered as a certain price and to be delivered as a specified date. Contracts were then drawn up between the farmer and the interested buyer that specified the certain amount of commodity to be delivered at a particular time in the future. From this system, what is now known as futures trading has begun.
It was sometime in 1878 that a central dealing facility for such commodities contracts was established in Chicago. In this facility, farmers and dealers began initially in spot dealing of their grains that was immediately delivered upon a reached settlement in price. It eventually evolved into futures trading when farmers started committing future harvests to interested dealers willing to buy to ensure that their grains supply are maintained in the future.
At the start, commodities trading at first consists only of one or two farm commodities like grains. But later a big number of other commodities joined in. Now there are commodities trading markets that deal in expensive metals like gold, silver and platinum. There's also a commodities trading market for cattle and cattle as well as for energy products like crude oil and natural gas. It has gone on to incorporate commodities trading in coffee, OJ ad industrials like lumber, cotton and even on rate of interest bearing instruments like currencies and stocks.
Article Source: FxTradingStock.com
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by: Johannes Spinoza
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Date: Mon, 7 Feb 2011
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