More Information On Commodity Market
Commodity futures contracts are the contracts that are committed to accept or make delivery of a pre-determined quality and quantity of a commodity on a specific date at a pre-determined price. The commodities that are traded in the exchange are supposed to deliver the goods at contract price and will not take into consideration the current prices that are prevailing in the market. Other than this market, you can also explore the cryptocurrency market to diversify your funds so that the risk and return get balanced. Read more about the cryptocurrency trading here.
An efficient and effective market for commodity trading futures requires:
- A large number of sellers and buyer with different risk profiles such as speculators, arbitrageurs, and hedgers
- Price volatility in underlying commodities
- Underlying physical commodities should be exchangeable
Organized- Always the commodity futures contracts are traded on the organized exchange.
Eliminates counterparty risk- The commodity future exchange uses the service of clearinghouse to ensure that all the terms and conditions are fulfilled. These clearinghouses help in eliminating any risk that arises when any one of the party defaults.
Standardized- The commodity futures contracts are standardized with quantity, quality, and delivery date as they are all pre-determined.
Facilitates the margin trading- In these contracts, you don’t have to mention the entire contract value. You are required only to mention the margin which will be roughly about 5 to 8% of the total contract value. The margin will be different for commodities and exchanges.
Regulates the market environment- The future contracts help in regulating the market and it ensures that all follow the rules set by the exchange. Also, the government closely regulates this market.
Physical delivery- The actual delivery of commodity will be made only on the expiry of the contract. The members are required to provide the exchange with delivery information.
Participants in the commodity market
Hedgers- They are the consumers and producers of the commercially traded commodities. They take part in trading by managing the risk of the sports market.
Arbitrageurs- They are the traders who make money taking advantage of the differential pricing across different markets.
Speculators- They take part in trading with the sole intention of earning money by speculating the future price movement. They do not prefer to accept or make actual deliveries of commodities. They liquidate their trading positions before the contract expires.
In order to take part in commodity trading, you need to have a thorough knowledge of the market