Commodity Markets

The commodity markets are essential for the production and trade of goods and services. They allow businesses to effectively minimize their risk, which, in turn, lowers their cost of doing business and benefits consumers with lower prices of goods and services.

At first glance, the commodity futures markets seem a lot harder to understand than stocks. However, after you learn the terminology and the mechanics of the futures markets, you’ll soon discover that is not the case.

The commodity markets are simply driven by supply and demand. Unlike stocks, they have no management issues, long-term liabilities, debt or outstanding lawsuits. There can be no secondary offerings in commodities or private placements that dilute share holder value.

So, why do they seem so confusing?

Unlike a stock certificate, a commodity futures contract is a legally binding obligation for the holder of the contract to buy or sell a particular commodity at a specific price and location at a specific date in the future.

These contracts are standardized to make sure the prices mean the same thing to everyone in the market; everyone trades contracts with the same specifications for quality, quantity, and delivery terms.

In order to distinguish between the different commodities, as well as the different contract months, all futures contracts have an assigned unique code. This unique code contains a one to three letter code that identifies the market, as well as a year and month code.

Each futures market also has a multiplier, which determines the value of each tick (the minimum price increment). The term “tick” dates back to the old ticker tape machines. You can determine the value of a day’s price movement by multiplying the movement in ticks by the multiplier.

Each commodity market has a different multiplier because it represents the contract size. The contract size was originally based on how much could be loaded into a railroad car. This is why contracts are sometimes referred to as “cars”.

Also, unlike the stock market, which usually rises and falls as a whole, the commodity market is more of a market of markets. Futures are made up of several non-correlated sectors that don’t necessarily rise and fall together.

The sectors pertain to two distinct groups; commodity futures and financial futures. The table below lists the sectors and some of the worldwide liquid markets that make up each group.

The best way to trade any of the above markets is in a diversified portfolio. Our Commodity Trading Strategy does just that. Click here to learn more about it.

CFTC REQUIRED RISK DISCLOSURE
Futures and options trading involve substantial risk. The valuation of futures and options may fluctuate, and as a result, clients may lose more than their original investment. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by or from Commodity Trading Solutions, LLC that you will profit or that losses can or will be limited in any manner whatsoever. Past performance is not necessarily indicative of future results. Information provided on this website is intended solely for informative purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.