Trading commodities?

Why?

We firstly have to destinguish between physical trading where the trade is for the actual commodity.  Although all trades eventually have to get to the physical point - most of the trading on the commodity markets is in the form of derivatives (meaning it is an entity that is derived from the actual commodity)  Most derivatives are in the form of Future contracts (the commodity to be delivered some time in the future at a price that is determined at the time of the transaction).  The markets have also added options to the arsenal where the option to buy or sell is also traded on the market.

People trade commodities for 3 basic reasons:

• They are either the suppliers of the raw material or products
• Or they are the processors of the raw material into usable products.
• Or they are speculating in the market.

Now first of all the supplier would like to get the best possible price for the commodity they are selling.  It is often a very technical analysis and seasonal tendencies occur.  Idealy the supplier would want to sell his product at the top of the price cycle.

The opposite is true of the processor - they would want to get the commodity at the lowest possible price and therefore would like to purchas their stock at the lowest point in the price cycle.

This leads to the requirement of the speculating participant.  They would buy and sell at any time depending on their personal expectation of the market and prices.

The prices are set by the participants making bids to buy and offers to sell and where the buyer and seller meet by virtue of agreeing on a price the deal is struck. These actions happen either in person or these days electronically via trading systems run by the major stock exchanges world wide.

There are several different commodities:

• The Hard commodities that would be the metals and other raw materials.  Gold, Silver and Platinum are the most well known metals. 
• The second group of commodities are the so-called energy commodities which include Crude oil, natural gas and heating oil amongst others.
• The final group of commodities I would like to mention is the agricultural commodities, Corn, Wheat, Soybeans would be just a few.....