Commodity Market

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What is the 'Commodity Market'

A commodity market is a physical or virtual marketplace for buying, selling and trading raw or primary products, and there are currently about 50 major commodity markets worldwide that facilitate investment trade in approximately 100 primary commodities.

Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (such as gold, rubber and oil), whereas soft commodities are agricultural products or livestock (such as corn, wheat, coffee, sugar, soybeans and pork).

BREAKING DOWN 'Commodity Market'

There are numerous ways to invest in commodities. An investor can purchase stock in corporations whose business relies on commodities prices, or purchase mutual funds, index funds or exchange-traded funds (ETFs) that have a focus on commodities-related companies. The most direct way of investing in commodities is by buying into a futures contract. A futures contract obligates the holder to buy or sell a commodity at a predetermined price on a delivery date in the future.

Major Commodity Exchanges

The major exchanges in the United States, which trade commodities, are domiciled in Chicago and New York with several exchanges in other locations within the country.

The Chicago Board of Trade (CBOT) was established in Chicago in 1848. Commodities traded on the CBOT include corn, gold, silver, soybeans, wheat, oats, rice and ethanol. The Chicago Mercantile Exchange (CME) trades commodities such as milk, butter, feeder cattle, cattle, pork bellies, lumber and lean hogs.

The New York Board of Trade (NYBOT) commodities include coffee, cocoa, orange juice, sugar and ethanol trading on its exchange. The New York Mercantile Exchange (NYMEX) trades commodities on its exchange such as oil, gold, silver, copper, aluminum, palladium, platinum, heating oil, propane and electricity.

Key commodity markets in regional centers include the Kansas City Board of Trade (KCBT) and the Minneapolis Grain Exchange (MGE). These exchanges are primarily focused on agriculture commodities. The London Metal Exchange and Tokyo Commodity Exchange are prominent international commodity exchanges.

Commodities are predominantly traded electronically; however, several U.S. exchanges still use the open outcry method. Commodity trading conducted outside the operation of the exchanges is referred to as the over-the-counter (OTC) market.

Regulation of Commodity Markets

In the United States, the Commodity Futures Trading Commission (CFTC) regulates commodity futures and options markets. The CFTC's objective is to promote competitive, efficient and transparent markets that help protect consumers from fraud, manipulation and unscrupulous practices. Regulation of commodity markets have continued to remain in the spotlight after four leading investment banks were caught up in a precious metals manipulation probe in 2014.