Commodity Futures

Commodity futures trading is the selling and buying of futures contracts for a wide range of commodity products. Industry players participate in commodity trading for different reasons. For instance, commercial end users of corn and wheat use these contracts to hedge their investments against sudden increases in prices. On the other hand, corn and wheat suppliers use futures contracts for hedging their future sales.

While these contracts are important for the two participants in the futures market, traders and speculators participate in this type of trade with the sole aim of making a profit.

A futures contract is basically an agreement to either sell or buy a certain amount of a specified commodity at an agreed date, at a price determined by the law of supply and demand.

Commodity futures are traded either electronically using electronic trading platforms or on the open outcry (the floor of an exchange). Over the last few years, the number of electronically traded futures has significantly increased. However, the number of exchanges has reduced as smaller exchanges have been amalgamated to form super commodity futures exchanges.

There is a main governing body for the commodities markets, the CTFC provides regulation and fair play to the commodities and options markets. The CTFC makes sure there is a level playing field, sniffs out manipulaton wherever possible and generally keeps an eye on brokers and market makers etc. It's well worth a read of their website.

Nowadays, even small retail speculators can trade in commodity futures because of the availability of up to date information and easy access to electronic trading software. This technology has made it possible for retail traders to participate in commodity trading even with little capital.

Some traders often invest in different types of commodity futures that have a potential to yield higher profits while others focus on certain commodities. The former do not get into details such as future supply and demand of a certain commodity, they just look at the bottom line.

With the opening up of markets in BRIC countries (emerging market economies such as Russia, China, Brazil and India), this type of trading is expected to grow. For instance, China-based Dalian Commodity Exchange plans to start dealing with a wide range of commodities apart from agricultural commodities. The exchange is planning to start trading in futures contracts for industrial metals among other commodities.