Home > Posts > Business > Types of Commodity Market

Types of Commodity Market

Commodity Market is a market that trades in the primary economic sector rather than manufactured products. Soft commodities are agricultural products such as wheat, coffee, cocoa, fruit, and sugar. Hard commodities are mined, such as gold and oil. The commodities market works just like any other market. It is a physical or a virtual space, where one can buy, sell or trade various commodities at current or future date. One can also do commodity trading using futures contracts. Like a stock, one can invest in a commodity through the commodity bourses.

Types of Commodity Market

Metals Commodity Market such as gold, silver, platinum, and copper. Global economic developments and reduced oil outputs from wells around the world can lead to upward surges in oil prices, as investors weigh and assess limited oil supplies with ever-increasing energy demands. Economic downturns, production changes by the Organization of the Petroleum Exporting Countries (OPEC) and emerging technological advances that aim to supplant crude oil as an energy purveyor should also be considered. 

Energy such as crude oil, heating oil, natural gas, and gasoline. Manufacturers and service providers use futures as part of their budgeting process to normalize expenses and reduce cash flow-related headaches. These hedges may use the commodity markets to take a position that will reduce the risk of financial loss due to a change in price. The airline sector is an example of a large industry that must secure massive amounts of fuel at stable prices for planning purposes. Because of this need, airline companies engage in hedging. Via futures contracts, airlines purchase fuel at fixed rates to avoid the market volatility of crude oil and gasoline, which would make their financial statements more volatile and riskier for investors.

Livestock and Meat including lean hogs, pork bellies, live cattle, and feeder cattle. Many investors use stocks of companies in industries related to a commodity in some way. For example, those wishing to make an oil play could invest in drillers, refineries, tanker companies or diversified oil companies. Those bitten by the gold bug could purchase mining companies, smelters, refineries, or generally any firm that deals with bullion. 

Exchange Traded Funds Commodity ETFs usually track the price of a particular commodity or group of commodities that comprise an index by using futures contracts, although a few investors will back the ETF with the actual commodity held in storage. In 2011, the University of Texas Investment Management Company, which oversees $21 billion in endowment and related assets, famously placed 5% of its portfolio in actual bars of gold bullion that were held in a New York bank vault as a currency play.

Exchange Traded Notes ETNs are unsecured debt designed to mimic the price fluctuation of a particular commodity or commodity index and are backed by the issuer. A special brokerage account is not required to invest in ETFs or ETNs.