The Simple and Clear Guide to Online Commodity Trading

To get into online commodity trading you must first understand what commodities are. See commodity definition.

A quick example is that ABC steel company uses iron in the production of steel. Iron is a commodity, although it is not commonly traded on futures exchanges. A bakery company uses wheat from a grain miller in the production of bread. Wheat is a commodity commonly traded on futures exchanges. Most everything you look at is commodity, many of them traded on commodity exchanges somewhere in the world. Everything from the gold in your jewelry to the milk in your fridge is a commodity.

Online commodity trading understanding what commodity trading means
When people talk about online commodity trading they mean trading derivative contracts, more commonly known as futures. Derivatives or futures are contract instruments between two parties for the exchange of a commodity whether it be a physical commodity like wheat or a financial instrument like a 10 year Treasury note or a foreign currency. The instrument must specify certain things in order to qualify as a futures contract: commodity, quantity, and quality, time of deliver and point of delivery. If you enter a contract to purchase 10 lawn mowers for your neighborhood next Thursday, essentially you are entering a futures contract. If another neighbor offered to purchase the contract to buy the lawn mowers from you at a higher price, then you would keep the difference and would have traded your contract. Remember the essential elements are commodity, quantity, quality, time of delivery, point of delivery.

There are two types of futures contracts, those that provide for physical delivery of a particular commodity and those that call for an eventual cash settlement rather than delivery. Many futures contracts have gone to cash settlement rather than delivery. Many futures contracts have gone to cash settlement recently as the scope of the market has increased beyond a local producer level. Cash settlement futures maintain the terms listed, only the delivery point is replaced by cash settlement. The majority of traders and online commodity trading takes place of realizing gains or losses by buying or selling an offsetting futures contract prior to the delivery date.

To learn more about commodity trading see more online commodity trading resources

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