Understanding About Commodity Futures Trading
Futures trading is a sort of investment where one can earn money by speculating on the cost of a certain commodity going down or up in days to come. Commodities are sometimes the fundamental things that folk use every day. Almost all of the times, these commodities are the basic necessities required by a modern society.
When talking about certain commodities being traded in the futures market, it must meet certain conditions to make it allowable for trading. One of the conditions is that the commodity should be standardized. In trading agricultural and industrial commodities, the traded commodity should be in its basic raw and unprocessed state. In this case, Wheat may be traded in the futures market but not flour.
Another condition a certain commodity has to meet is that the perishable kind should have acceptable lifespan. The explanation for this is that these commodities are traded with their delivery prepared deferred at a future time. There may need a long product life so the commodities could be delivered with its quality still good and untouched. Another condition a certain commodity should meet is that it ought to have a price that changes frequently making some doubt as well as chance to profit.
The history behind commodities trading in commodities developed from the farmer’s need to earn more from each crop. Before commodities trading started, the farmers were always in the power of the dealer when talking of pricing and selling their crops. Dealers typically set the costs and the farmers can’t to anything apart from accept the terms. In a way the farmers were being exploited by some dealers and so another kind of selling their crop.
In the hunt for having a fair system of engaging in business, farmers commenced offering future crop to interested consumers. The farmers started giving their own terms for the future crops to dealers. The exchange is composed of commodities offered as a certain price and to be delivered as a stated date. Contracts were then drawn up between the farmer and the interested buyer that stipulated the certain quantity of commodity to be delivered at a selected time in times to come. From this system, what’s now known as commodities trading has started.
It was sometime in 1878 a central dealing facility for such commodities contracts was established in Chicago. In this facility, farmers and dealers commenced initially in spot dealing of their grains that was immediately delivered on a reached settlement in cost. It ultimately developed into commodities trading when farmers started committing future crops to interested dealers prepared to buy to make certain that their grains supply are maintained in future times.
At the start, commodities trading at first consists only of one or two farm commodities like grains. But later a big number of other commodities joined in. Now there are commodities trading markets that deal in expensive metals like gold, silver and platinum. There’s also a commodities trading market for cattle and cattle as well as for energy products like crude oil and natural gas. It has gone on to incorporate commodities trading in coffee, OJ ad industrials like lumber, cotton and even on rate of interest bearing instruments like currencies and stocks.
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