Commodities are unprocessed or partially processed goods, agricultural products, metals, and energy products that are traded on global markets. These goods are of vital importance to the global economy as they are used to produce other goods and services.
The commodities market is divided into two main categories: the physical market and the financial market. In the physical market, commodities are bought and sold in physical form. For example, oil is purchased and sold in physical quantities. On the other hand, in the financial market, commodities are traded through financial instruments such as futures contracts and CFDs (Contracts for Difference).
Futures contracts are legal agreements between the buyer and the seller to buy or sell a certain quantity of commodities at a predetermined price and on a future date.
CFDs, on the other hand, allow investors to speculate on the price movements of commodities without the need to own them physically or bear the risk of physical delivery.
For instance, an oil producer can use the commodities market to sell their oil at a fixed price, even if the price of oil decreases in the future.
When talking about selling oil at a fixed price, we refer to the use of futures contracts. In this case, the oil producer sells the oil at a predetermined price in a futures contract that has a future expiration date. This means that regardless of the oil price in the market at that time, the producer will receive the agreed-upon price stated in the futures contract upon expiration. In practice, the oil producer is trying to mitigate the risk of future fluctuations in the oil price. If the oil price increases, the producer may lose the opportunity to earn more by selling the oil at a higher market price.
On the other hand, if the oil price decreases, the producer may receive less money than they would have received by selling the oil at the market price at that time. By using futures contracts, the producer can secure a fixed price and mitigate the risk of future price fluctuations.
The price of commodities is influenced by various factors such as global market demand and supply, the political and economic situation of producing countries, weather conditions, and currency fluctuations.
Another important aspect of the commodities market is its seasonality. For example, the price of wheat tends to increase during the planting season due to increased demand and limited supply. Conversely, the price of oil tends to rise during the winter season due to increased demand for heating fuel.
Commodities are a popular investment among investors looking to diversify their investment portfolios and reduce risk. Additionally, commodities are often used as hedging instruments, such as to protect a company’s production prices from potential increases in the prices of the commodities used in production.
In conclusion, the commodities market is a global market where various types of commodities are traded. This market offers numerous investment opportunities for investors, both through the physical market and the financial market. However, it is important to note that commodity trading involves a high level of risk and requires a deep understanding of the market and trading strategies.
