A-z Commodity Trading Terms

Commodity futures trading, as we know it today, came about for the very first time in Japan in the seventeenth century, where rice was traded in future contracts. It was a time when farmers and buyers came together and agreed to commit to each other future prices negotiated on suitable terms in exchange of grain for money. A dealer would agree to purchase a ton of rice at the expiration of the next month for a certain price from a farmer, for example. This would be ideal for both parties, as the farmer would find out how much he would get for his rice in advance, and the purchaser could plan to increase the money he required for the purchase. Contracts such as these became increasingly popular and common, and were even used as collateral for taking loans. If the buyer couldn’t take delivery of the rice, he could sell the contract to someone else. On the other hand, if the farmer couldn’t deliver the goods, then he could deliver the contract to another farmer. Thus began commodity futures trading, as we know it today.

Futures trading: Here, commodity trade is based on the development of a contract with an agreed price. This price is the price a specific quantity of the commodity will reach at a future date.

Commodity prices undergo price fluctuations and so, both parties are hedging their risks by drafting a contract.

Sellers secure the future prices of their goods by hedging. They do this, with a view to make sure they get a fair price for them, and to determine their costs in advance. To do this, the seller drafts a futures contract with the buyer to which he (the buyer) will be similarly committed. However, there is no requirement for them to continue to hold it up until its expiry date, so it can be sold at any time in the interim period. More than ninety five percent of contracts are terminated before their expiry in this manner. An endless number of contracts can be held in respect of the same commodity for equivalent or different price values.

If neither party wishes to hold onto a contract, it can be provided on the market for closing so that a speculator or a commercial entity can buy or sell it. Almost all contracts are closed this way before they reach their expiry term. Since the amount of commodity trading is always extensive, it has the desired impact of stabilizing prices especially close to the expiration date of a contract.

Today, most of the futures commodity trading exchanges are put in place in a similar way. Members of the exchange do the actual trading on the floor. Stock stands for equity in a public company, and can be held until you want, whereas commodity futures trading contracts have a specified life. In the past, people used commodity futures trading methods generally to hedge risks and fluctuation in prices, or to be taken advantage of them, and not for actually buying into the commodity. The idea is that a contract requires delivery of the commodity within a certain predefined time period unless it becomes null and void. The person buying the commodity futures trading contract agrees to purchase the specified commodity at a fixed price on a certain date. The person selling the commodity futures trading contract agrees to sell the commodity at a certain price on a certain date. As time goes on, the contract price fluctuates, and this brings about profit and loss in the trade. It is to be noted, however that, the delivery generally does not take place. The contract is usually liquidated before its expiry. The entire trade is based on the assumption that there will be no delivery. However, we can speculate on the price of the underlying commodity at a future time to make money. Commodity futures trading is done in all parts of the world now.