Loading the player...

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'

Commodities can be invested in numerous ways. 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.

RELATED TERMS
  1. Commodities Exchange

    A commodities exchange is an legal entity that determines and ...
  2. Soft Commodity

    A soft commodity is a grown commodity such as coffee, cocoa, ...
  3. Commodity Index

    A commodity index is an investment vehicle that tracks a basket ...
  4. Exempt Commodity

    Any commodity other than an excluded or agricultural commodity. ...
  5. Exchange-Traded Commodity (ETC)

    An exchange-traded commodity (ETC) gives traders and investors ...
  6. Spot Commodity

    A spot commodity is any commodity available for immediate trade, ...
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

    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.
  3. Investing

    Top 3 Commodities ETFs for 2018

    Commodities funds trended down in the first half of 2017 but have been moving up since June. These ETFs could continue their momentum.
  4. 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.
  5. Investing

    Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Find out how to use them.
  6. 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.
  7. Investing

    Investing In Commodities Without the Hassle: Try Commodity ETFs

    Exchange-traded funds (ETFs) that invest in commodities offer a convenient, low cost way to access the commodities markets.
  8. Investing

    3 ETFs That Suggest Commodities Are Headed Lower (COMT, DBC)

    Nearby trendlines and resistance from major moving averages suggest that the broad commodities market is headed lower from here.
  9. Investing

    Hedge Funds Pray for High Commodities Prices in 2017

    The commodities rally in 2016 was strong, giving hedge funders hope for 2017.
RELATED FAQS
  1. 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 >>
  2. How can electricity be traded as a commodity by an individual investor?

    Learn the characteristics unique to electricity trading as a commodity and how investors can trade electricity futures on ... Read Answer >>
  3. What types of futures contracts are typically sold on an exchange?

    Explore the wide variety of available futures contracts traded on exchanges, which range from agricultural commodities to ... Read Answer >>
  4. In forex, what are the commodity pairs?

    In forex, the commodity pairs consist of the heavily-traded currency pairs and contain the Canadian, Australian and New Zealand ... Read Answer >>
  5. What's the difference between the Chicago Board of Trade (CBOT) and the Chicago Mercantile ...

    Read about the CBOT and Mercantile exchanges; both are futures exchanges that offer different futures contracts and specialize ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center