What is the commodity market?

What is the commodity market?

The commodity market is an international network of exchanges which trade commodity spot contracts, futures contracts, and derivatives.

The largest commodities exchange in the world is the CME Group in Chicago. Futures are a large part of commodities trading, and the commodities futures market includes currency futures and swaps, index futures and single-stock futures, and other derivatives based on futures contracts.

Commodities and their futures offer a wide range of investment opportunities; in fact, taken together, this is the largest market in the world next to the Forex market, which is often lumped in with this one in consideration of the large number of currency futures and forward contracts.

Commodities and their derivatives have become so heavily traded partially because they are ubiquitous, are necessary for all manner of industries, and the high demand creates a pleasantly volatile space in which traders can pursue profits.

Commodities futures basically constitute the origin of modern markets as we know them. It used to be that this was always based on the need for those involved in the production and procurement of natural resources to secure buyers and prices for their goods before the work was begun.

Today, some futures contracts are based on a physical delivery contract, which speculative traders can still use if they close their positions before they are assigned or the delivery date.

Other futures are cash-settled, and these, especially, are a space that speculators can play in. Spot-trading commodities is a slightly different creature than the futures market, as is the market for swaps and other instruments.

Commodities are also divided into soft commodities and hard commodities, where the soft ones are agricultural and have a certain shelf-life, and hard commodities are mined or extracted materials such as metals and oil.

With the advent of Bitcoin and the Blockchain currencies, the commodities market has the opportunity to be the center of activity and regulation for these electronic commodities.

Some believe that the market for futures and derivatives has become unnecessarily and even unhealthily large in the big economic picture, considering there is no production of actual goods, few jobs are created by it, and so on.

Many average investors are still drawn to it, partially because commodities futures allow investors to use less margin than is required for stock-market margin accounts, meaning they can get more leverage to potentially higher gains.

What is Market Arbitrage?