Commodities are resources that our civilization needs to operate. The commodities market exists to maintain a constant supply of these materials to industry. It performs this role by ensuring that suppliers receive the best price possible for these products.
Commodities trading are based upon options, an option is a contract to buy a set amount of a certain product such as wheat. Options or futures can be bought and sold much like stocks. This trading was created to ensure farmers with a steady market for their products and buyers with a steady supply. When people trade commodities they are actually purchasing contracts or options.
The trader hopes that the value of the commodity Tips and the value of the option will increase. That way he or she will be able to sell it and realize a profit. That makes options trading a kind of speculation rather than investment. A speculator such as a commodities trader hopes to make a profit on a transaction.
There are two principal kinds of commodities contracts traded on the major exchanges like the Chicago Mercantile Exchange spot options and derivatives. A spot option is a contract that enables somebody to take ownership of a set amount of a commodity such as a train car full of grain at a certain date. A derivative is a security or equity based upon the potential value of an amount of a commodity.
Commodities traders purchase both of these often using margins or funds borrowed against the potential future profit form their sale. A margin account is actually a credit line that a person can use to finance trading. The trading was originally done in pits at organized exchanges such as the Chicago Merc. Today, it is mostly done electronically through a computerized network.
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