Commodity, Commodities

November 23, 2010Commoditiesby EconomyWatch

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A commodity is an article of commerce or trade that is in demand and sold by various suppliers without any qualitative differentiation. Generally, commodities are raw materials whose prices are based on market demand and supply. Commodities are of two types, hard and soft. Tea, coffee, sugar, sisal, cocoa, corn soya and pork bellies come under the category of soft commodities. Some examples of hard commodities are metals, such as aluminum and copper.

What is a Commodity Market?

A commodity market is a place where the exchange of primary or raw products happens in regulated commodity exchanges. The buying and selling of these products occurs through standardized contracts.

The commodity markets have their origins in the ancient civilization of Sumer in Southern Iraq. Tokens were used to trade commodities. This included specific timeframes and delivery of commodities, just like contemporary futures contracts. By the 19th century, the crude commodity markets paved the way for modern, regulated and standardized markets in the US, where agricultural products and cattle were traded.

For most people, commodity markets are not a primary area of investment as they are not designed for retail investors. However, investing in commodities can improve the overall rate of return of an investment portfolio with sufficient care and planning.

Which are the Main Commodity Exchanges?

  • Kansas City Board of Trade.
  • New York Mercantile Exchange.
  • Chicago Board of Trade.
  • London Metal Exchange.
  • Multi Commodity Exchange.
  • Kuala Lumpur Futures Exchange.
  • Dalian Commodity Exchange.

Who Should Invest in Commodities?

Whoever plans to diversify his/her investment portfolio and earn high returns from price fluctuations should invest in the commodity market. Before investing, it is important to gather as much information as possible and avoid losses. Trends are always unpredictable in the commodity market. Investors are advised to be aware of commodity demand cycles and factors impacting demand.

What Risk Factors are involved in Commodity Trading?

Profits and losses in commodity trading are quite uncertain. This is usually done in the form of futures. Thus, commodity trading also involves similar risk factors like that of future trading in equity markets.

Despite risk factors, commodity trading is preferred by investors who like to take risks so as to earn high returns even when trends are unpredictable.

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