A:

Commodities are extremely important as they are essential factors in the production of other goods. A wide of array of commodities exist, including coffee, wheat, barley, gold and oil. Even orange juice is traded as a commodity. These commodities are traded constantly on commodity exchanges around the world such as the Chicago Mercantile Exchange, Winnipeg Commodities Exchange (WCE) and the New York Mercantile Exchange (NYMEX).

Since commodities are traded on exchanges, their prices are not set by a single individual or entity. On the exchanges, commodities are traded via futures contracts. These contracts obligate the holder to buy or sell a commodity at a predetermined price on a delivery date in the future. Not all futures contracts are the same - their specifics will differ depending on the respective commodity being traded.

The market price of a commodity that is quoted in the news is often the market futures price for that respective commodity. As with equity securities, a commodities futures price is determined primarily by the supply and demand for the commodity in the market. For example, let's look at oil. If the supply of oil increases, the price of one barrel of oil will decrease. Conversely, if the demand for oil increases, which often happens during the summer, the price of oil will increase.

There are many economic factors that will have an effect on the price of a commodity. Although commodities are traded using futures contracts and futures prices, events that occur now will affect the futures prices. This can be seen in the volatility of oil prices during the Gulf War in Iraq. The price of oil constantly changed in respect to what was going on in the war, and was also affected by the likelihood that Saddam Hussein would be able to retain control of Iraq. For other commodities such as crops, weather plays an extremely significant role in price changes. If the weather in a certain region is going to affect the supply of a commodity, the price of that commodity will be affected directly.

As with other securities, many traders use commodity futures to speculate on future price movements. These investors analyze various events in the market to speculate on future supply and demand. They subsequently enter long or short futures positions depending on which direction they believe supply and demand will move.

To learn more, see Commodities: The Portfolio Hedge, Futures Fundamentals and Interpreting Volume for the Futures Market.

RELATED FAQS
  1. Can commodities also be investments?

    Learn about the commodities trade and several different ways investors may participate. Find out about some of the advantages ... Read Answer >>
  2. Can mutual funds invest in commodities?

    Learn how investors can use commodity mutual funds to diversify their portfolios, and discover why mutual funds may be less ... Read Answer >>
  3. Which of the following would be considered a short hedge ...

    The correct answer is a) Long the commodity and short the futures Read Answer >>
  4. What's the difference between a commodity and a product?

    Understand the difference between commodities and products, and learn how they are connected to each other and to market ... Read Answer >>
  5. Do hedge funds invest in commodities?

    Learn about hedge funds that invest in commodities. Read about Commodity Trading Advisors who focus specifically on trading ... Read Answer >>
Related Articles
  1. Financial Advisor

    When Will it Be Safe to Buy Commodities?

    When will it be safe to buy commodities (and which ones)? A closer look at the commodities markets and how they move.
  2. Investing

    Understanding the Commodity Market

    There are currently 50 physical and virtual commodity markets worldwide where almost 100 primary commodities trade through the exchange of ownership rights.
  3. Investing

    How To Invest In Commodities

    Find out which futures, options or funds will be your perfect commodity portfolio fit.
  4. Investing

    The Role Of Speculators In The Commodity Market

    Contrary to popular belief, speculators are important for the market. Find out exactly what they do.
  5. Investing

    Commodity Funds 101

    These funds make investing in gold, oil or grain an easier prospect.
  6. Financial Advisor

    An Overview Of Commodities Trading

    Commodities markets, both historically and in modern times, have had tremendous economic impact on nations and people. Investing in commodities can quickly degenerate into gambling or speculation ...
  7. Investing

    All About Liquid Commodities

    You might hear 'liquid commodities' and think of an auction, but they're actually a high-volume, fast paced financial product suitable for day traders.
  8. Investing

    3 Reasons to Invest in Discounted Commodities

    Though they're selling at depressed prices, there are several reasons that it could make sense to invest in commodities now.
  9. Investing

    Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Find out how to use them.
  10. Investing

    DBC: PowerShares DB Commodity Tracking ETF

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
RELATED TERMS
  1. Commodity Market

    A physical or virtual marketplace for buying, selling and trading ...
  2. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  3. Cash Price

    The actual amount of money that is exchanged when commodities ...
  4. Long The Basis

    An individual or company that owns or has purchased a commodity ...
  5. Commodity ETF

    Exchange-traded funds that invest in physical commodities such ...
  6. Commodities Exchange

    An entity, usually an incorporated non-profit association, that ...
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center