1: commodities definition
2: how commodities works
3: commodities vs derivatives
4: example for commodities
Opening information:
Commodities means raw materials or matter of something, this material would be physical, which means wheat, oil, natural gas, corn, gold, diamonds extra…
which would be used to exchange between the producer and buyer, the producer is the one, who would be the seller on the market.
Now let’s have a look at what is a commodity, how commodities work in the public market, and what is the difference between commodities and derivatives, here is one example of commodities.
1: commodities definition
Mr. Jack, Mr. Monu, and Mrs. Konke three of them are business People, and Jack is a producer of natural gas in his whole state.
Jack natural gas is considered high quality in the whole stock market. It’s made the natural gas stand out from the crowd.
On the one hand, Mr. Monu is an oil producer, which already running his business very successfully, but he is not a state-level market supplier, instead, he is one of the global-level supplier oil producers on the planet.
On the other hand, Mrs. Konke is a wonderful woman, and she is a producer of the best wheat in his town. It makes her business very profitable over time in any kind of market situation.
We already noticed that these three business people are most likely profitable in all situations.
For this reason, when any of these three person lack confidence in a prediction of profits, they tie up the contract with someone who would be ready to purchase their raw materials of community goods.
Using a contract agreement with someone, they pre-determined the price of their raw materials, this helps them to sell the whole materials for profits even if their goods price of value decreases over time.
Here the raw materials of community goods are called commodities, so now let’s dive into how the commodities work in the public market.
2: how commodities works
Using these commodities hundreds and thousands of people started to produce raw items in a market, but not in a stock market anyway instead in a normal market.
Any commodities that want to trade on the commodities exchanges must register with the Commodities Futures Trading Commission (CFTC).
Without the approval of the CFTC, nobody couldn’t list their securities of commodities in any of the commodities trading exchanges.
Once the Securities got listed on the exchange, then the certain person was allowed to write a contract about their commodities.
The contract would be based on the types of agreement certain contracts written for it.
For instance, If the commodities gold contract writer uses to sell the gold With a certain premium because of a certain guess of a decrease in the value of gold over time in futures.
On the other side, gold contact buyers predict that certain gold will be raised in the future time.
If the gold price falls over time based on the prediction of the contract writer, then the contract writer would profit from the gold at today’s determined price.
Or else if the gold price rises above the contract writer’s price, the contract writer would lose the amount from the purchase to the pre-determined price.
Using the commodities, traders trade multiple items with different contracts to find strong profits in them. This made the commodities more popular among the speculators who loved to trade using the contracts.
Most people in the commodities market confuse commodities and derivatives, so let’s jump into the differences in it. So you might understand well enough about commodities.
3: commodities vs derivatives
The difference between commodities and derivatives, commodities are items of physical things like tangible objects.
But the derivatives are the ones, that derive the price of value from one matter or thing to write a contract about.
Here the one matter or thing is a commodity, and the derivatives are the contract of writing between the producer (seller) and buyer using the commodities.
So the key difference between commodities and derivatives is, that commodities are items of security and derivatives are the contracts used to trade commodities and more.
Moreover, to make this more clear, let’s have a deep look at commodities.
4: example for commodities
Say your friend writes a derivatives contract using the commodities of oil, and you enter into your friend’s contract and agree with him to pay a premium now to sell the oil in the future at a pre-determined price.
If the certain oil couldn’t rise above the pre-determined price, then your friend, who wrote a derivatives contract on oil would keep the premium you paid to him.
When comes to a written contract, the contract would have different types of derivatives such as option, future, forward, and swap extra…
Market rule: #100156
Commodities come under the market rule because those commodities are traded by the public market which is unavoidable for commodities traders. But any decision that commodities traders take based on their concept is completely responsible from their side.
If your investor and not comply or align investing based on market rules please learn about how to regulate your investments under your control with the use of Rule investing.