What are Commodities?
Simply put, commodities are natural resources, such as chemicals and physical products which one can smell, taste, touch, mine, grow deliver or consume - for instance gold, coffee and corn. They are also known as physical assets.
Futures Market
As you will see, the notions of futures and commodities are closely linked. What are financial futures? As their name suggest, they are speculative sales or purchases of commodities for future delivery or receipt. A financial futures contract specifies a certain quantity of the underlying financial instrument at a market-determined price. They can be settled via cash or physical delivery, depending on the instrument in question.
Commodities and Futures Markets
Let us go back in time to the 1800s when futures markets appeared. From that time and until the 1970s, futures markets, (or financial futures as they are called today) and commodities were one and the same. Today, the term commodity trading may still denote a broad industry, including all futures contracts. For example, "commodity trading advisor" refers to an individual or firm operating a managed futures program, though many of them trade exclusively interest rates or stock indexes, which are not by any means actual natural resources.
The Futures Industry Today
Today, the futures industry still relies on physical commodities, to some extent, but the most highly-traded futures today are financial contracts, such as interest-rate sensitive instruments, equity instruments, or currencies.
Physical Commodities
Physical commodity contracts can be divided into several categories: metals, energy, grains, livestock, food and fiber. The prices of production and consumption are largely controlled by the forces of supply and demand.
Commodity Futures Contract
This type of contract refers to an agreement to buy or sell a specific type and grade of commodity to be delivered at a specific time in the future at an agreed upon place and at a market-determined price.
Continue to: History Of Commodity