Commodity Futures Trading

Commodity Futures Trading

Commodity futures trading is a type of investment where one can make money by speculating on the price of a certain commodity going up or down in the future. Commodities are usually the essential things that people make use of everyday. Most of the times, these commodities are the basic essentials needed by a modern society.

When talking about certain commodities being traded in the futures market, it must meet certain conditions to make it allowable for trading. One of the conditions is that the commodity should be standardized. In trading agricultural and industrial commodities, the traded commodity should be in its basic raw and unprocessed state. In this case, Wheat may be traded in the futures market but not flour.

Another condition that a certain commodity has to meet is that the perishable kind should have adequate shelf life. The reason for this is that these commodities are traded with their delivery scheduled deferred at a future time. Therefore, there may require a long shelf life so that the commodities may be delivered with its quality still good and intact. Another condition that a certain commodity should meet is that it should have a price that changes often, creating some uncertainty as well as opportunity to profit.

The history behind futures trading in commodities evolved from the farmer's need to earn more from every harvest. Before commodity futures trading started, the farmers were always at the mercy of the dealer when it comes to pricing and selling their harvests. Dealers usually set the prices and the farmers cannot to anything but accept the terms. In a way the farmers were being exploited by some dealers and so another form of selling their harvest.

In the search for having a more fair system of doing business, farmers began offering future harvest to interested buyers. The farmers started giving their own terms for the future harvests to dealers. The transaction consists of commodities offered as a certain price and to be delivered as a specified date. Contracts were then drawn up between the farmer and the interested buyer that specified the certain amount of commodity to be delivered at a particular time in the future. From this system, what is now known as futures trading has begun.

It was sometime in 1878 that a central dealing facility for such commodities contracts was established in Chicago. In this facility, farmers and dealers began initially in spot dealing of their grains that was immediately delivered upon a reached settlement in price. It eventually evolved into futures trading when farmers started committing future harvests to interested dealers willing to buy to ensure that their grains supply are maintained in the future.

In the beginning, futures trading initially consists only of a few farm commodities such as grains. But later on, a huge number of other commodities joined in. Now there are futures trading markets that deal in precious metals such as gold, silver and platinum. There is also a futures trading market for livestock and cattle as well as for energy products such as crude oil and natural gas. It has gone on to include futures trading in coffee, orange juice ad industrials such as lumber, cotton and even on interest rate bearing instruments such as currencies and stocks.

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