Commodity Trading

What is Commodity Trading

Commodities are uniform and one individual or portion serves the same purpose as any other. An ounce of gold, a barrel of oil, a bushel of wheat. In every case, one is pretty much like another.

It makes little difference to most of those buying commodities whether they receive this ounce of gold or that one.

Observe there are some differences. Because of shipping costs, differences in composition, and so forth, some oil does sell for a different price than that from another source. Texas crude and North Sea oil are close enough for many purposes, but they trade on different markets and have different prices.

Commodities can be traded on either spot markets, or in the form of futures.

Spot markets are those in which the commodity is traded immediately in exchange for cash or some other good. You go to the local jewelry store and buy an ounce of gold. That's a spot trade. You give the jeweler several hundred dollars in cash, he gives you an ounce of gold, usually in the form of a coin, 'on the spot'.

Other traders exchange commodities on spot markets in much larger quantities - thousands or millions of ounces of gold or barrels of oil. At some time the actual goods is delivered. After all, at some point, someone has to use the goods or it's, so to speak, no goods.

In the form of futures (or options), what is traded is not the goods itself, but a contract to buy or sell the commodity for a certain price by a stated date in the future. Hence the name.

Most commodities trading is done in the form of futures or options and it's that scenario that gives rise to most of the huge potential for profit and loss. It also gives rise to all the interesting aspects of trading, since it inherently involves predictions of the future and hence uncertainty and risk.

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