How the Commodities Market is Standardized

Most people have heard of the commodities market. But there is a big difference between knowing about it and understanding how it works. Commodities are so called raw products. These could be food items, types of energy or different precious metals to name just a few.

The issue of standardization and how it works

Unlike other types of trading platforms, the commodities market requires all traded items to be standardized. This prevents substandard items being traded for the same price as superior items. Each item traded has a specific set of instructions and details applied to it, so the commodity falls into a specific grouping. Many different aspects of a particular commodity can be gauged, but among the most common are the quality of the item and where it comes from.

The amount of the said commodity will also have an effect, with rare commodities reaching higher prices typically because they are more sought after than commonly occurring ones.

Would the commodities markets work if standardization didn’t exist?

It is fairly reasonable to say they would fall into disarray. In fact trust in certain commodities may be eroded because the potential buyers wouldn’t know exactly what they were buying.

Let’s look at an example using one commodity in particular – wheat. If you wanted to trade in this commodity at present, you would be assured of several things. You would know the commodity is reliable, available and of a certain quality, otherwise it would not be listed on the commodities exchange. This gives you the confidence you need to consider it as a potential investment.

Now let’s think about what would happen if standardization did not exist. In this situation you may think twice about such an investment. After all, with no standard parameters in place, how do you know whether the wheat is of high quality or poor quality? Furthermore do you know where it is based or how much of it there is?

All of these parameters – a staple part of the standardization process – give the buyer confidence in what is being offered. Without them buyers would probably shy away from investing in these commodities – and that could spell disaster for the market as a whole.

Needless to say, the very nature of raw commodities means they are not necessarily all the same. To this end, the standardization of the process makes it easier to regulate the marketplace so buyers find it easier to tell which items they want to invest in. Whether it is wheat involved, or something else entirely such as a raw metal, it is important to ensure everything on the market is of approvable and identifiable quality. Without this structure in place, the market simply would not work.

So the next time you consider getting involved in the commodities market, be aware of the existence of standardization. It is one of the best indications there is of the quality of whatever you happen to be interested in investing in.

Tips for Understanding Commodities Spreads

Let’s face it, the term commodities spread betting is enough to make most people’s eyes glaze over. But if you’re thinking about getting involved in commodities trading, it makes sense to find out everything you can about spread betting. If you don’t you could end up with a major loss on your hands. And since you’re understandably looking to make some cash from this form of investing, I’m guessing that wouldn’t be very good news.

The good news

Spread betting on commodities can be done tax free. So there is your first indication that this is worth a closer look.

The bad news

Well not so much the bad news but the realistic news – spread betting is a risky proposition. It’s a bit like penny stocks – they’re cheap and attractive and you can make a lot of money on them if you pick the right ones. But if you get it wrong (as many people do) you could lose a lot of cash. Spread betting is much the same.

So what is spread betting?

Well it is a form of betting, let’s get that clear. You are betting on whether a particular commodity is going to go up or down in value. For example you might think grain is woefully underpriced at the moment and is ripe to rise in value. So you put a spread bet on that fact and hope you’re right. If you are right you’ll make money on your bet. If you’re wrong you’ll lose the money.

Some people compare spread betting to wagering cash on a horse race. You can look at form and history and use those as a guide to what could happen in the future. But of course anything could happen in the actual event, and that is what makes spread betting so risky.

A key tip for improving the odds

One thing you can do is to become educated in the commodities you want to put spread bets on. For example you can learn more about house prices and where they currently stand if you are interested in putting spread bets on them. Or you can look into any other commodities to see how they work and where the prices currently stand.

Another good tip is to practice and follow spread betting and examples of betting to see whether you have got things right. Think of it as using play money to see whether you would have made a profit on your chosen bet. This is a good way to play realistically and to set aside those romantic notions that you’ll always be in with a successful result.

How Did the Commodities Market Begin?

If you are considering making an investment in the commodities market it makes sense to find out as much as you can about it first. This can lead you to make a better investment than you would otherwise. In addition to this there is the opportunity to learn how the market began – and it might actually go back a lot further than you think.

Before the days of money

While we are used to using coins and banknotes by way of making payment nowadays, there was a time when money didn’t exist. Ancient times saw people using commodities to make deals with each other. Sometimes a token would be made in clay that would feature the number of animals a person would agree to trade with another. While this is far removed from the way the commodities markets are run today, the principle is very much the same. Many people would be surprised to see how many hundreds of years’ back the history goes.

The modern commodities market

Of course the commodities market in the present day is a totally different thing. Nowadays it must be properly regulated to ensure the deals are fair for everyone. Indeed this was one of the reasons why the first proper commodities market was created in 1849.

You may recognize the name of this market, since it is the Chicago Board of Trade. This was not only the first market of its kind it is also one of the most successful of its kind today. Nowadays it is part of the CME Group, which is comprised of the Chicago Board of Trade and the Chicago Mercantile Exchange.

How the commodities market has changed over the years

There is no doubt the creation of the Chicago Board of Trade in 1949 made a big difference to things. More regulations have been put in place since that time to make sure the market is protected and that trades can only be made in a certain way.

Typical examples include The Commodities Exchange Act, which came into being in 1936, and the Futures Trading Act, which came into force several decades later in 1982. The good news is that all these acts and rules mean it is easier to know what to expect when you delve into the commodities market.

In a similar fashion we can no doubt expect this marketplace to change even more in the future. Nothing ever stays the same for too long in this sense, and this goes for commodities too. We will always need commodities and lots of people like to invest in them because they can provide a more consistent profit than you might get in regular stocks and shares.

But regardless of whether you decide to invest in them or not, you will see how fascinating it is to look back into history and explore what commodities meant in the past. Things may have changed in many ways, but the principle is still there.

What Are the Top 5 Commodities Exchanges?

Just as stocks and shares are traded on the stock exchange, so commodities are traded on a commodities exchange. Commodities may be viewed as tangible items, mainly those that are derived from agriculture. Typical examples include wheat, maize and barley, although there are many others. Other commodities can also be traded on these markets, including metals and coffee.

There are plenty of commodity exchanges all over the world, but some are more popular and better known than others. Here are the top five most commonly used commodity markets in the world today, in no particular order.

The Chicago Board of Trade

Not only is this the largest market of its kind, it is also the oldest of its kind. It was founded back in 1848 and some four dozen separate commodities are traded here every day.

Tokyo Commodity Exchange

It should not come as a surprise to hear that Japan has an entry in the top five, and it is the Tokyo Commodity Exchange. A range of metals are traded here daily, along with other oil based items.

NYSE Euronext

This is a very modern company, in stark contrast to the more traditional feel of the two above. It offers the opportunity to trade in commodities of all kinds and cocoa and coffee can be found among the items it offers.

Dalian Commodity Exchange

This commodity exchange hails from China and is nearly twenty years old. It does not make a profit on its trades but provides the opportunity to deal in soybean, palm oil and corn among other things.

Multi Commodity Exchange

The final entry in the top five is this exchange from India. It is commonly known by its abbreviation MCX. It focuses on trading in both non-ferrous and ferrous metals, as well as offering the ability to trade in potatoes and various agricultural oils.

Clearly the Chicago Board of Trade is streets ahead in terms of age, but each commodities exchange has its own style and focus. They do not all trade in exactly the same items, although there is some overlap there. The Chicago Board of Trade probably has one of the largest ranges of commodities to deal with on a daily basis, while others focus in a little more specifically on certain things. After these five there are a couple of other exchanges you may also have heard of, including the Intercontinental Exchange and the Africa Mercantile Exchange.

Dealing in commodities runs along the same lines as dealing in stocks and shares. This holds true in that the prices can go up or down, and you can also choose those items that you feel show more promise in the long run. Commodities are just as much affected by outside forces as stocks and shares are (perhaps even more) and so it makes sense to learn as much about commodities trading as you can if you want to get involved with it. This holds true regardless of which market you decide to use.

How To Invest in Commodities

Investing in commodities like oil or gold has been popular for the last several years, because these assets have been rising in price.  Also, commodities are traditionally seen as a hedge against inflation (which many believe is coming), as well as serving a purpose in industrial uses.

However, investing in commodities has usually been tricky because it has usually been done contractually, or through the use of futures contracts.  The futures market is tough, as it involves margin and leverage, and has many seasoned players.

However, there are other ways to invest in commodities that may suit the regular investor.

Commodity ETFs

Over the past few years, many commodity ETFs have been created to help investors enter this market.  These ETFs are designed to track the underlying asset price, and do so through contracts behind the scenes.

As a result, they don’t perfectly follow the underlying price, but they come very close.  They also offer investors the relative safety of not having to directly invest in contracts themselves, but rather the ETF product.

If you want even more leverage, there are also leveraged ETFs that track the underlying commodity in multiples, such as 2x or 3x funds.  These funds ramp up returns, but also multiple losses significantly.

Commodity Producer Stocks

Instead of investing directly in the commodity itself, many investors choose to invest in the company that makes or extracts the commodity.  This can be a good play because these companies usually benefit as well from rising commodity prices.

However, since you’re not invested in the actual commodity, but a company, you usually gain more liquidity and safety.

Investing in the company can also be a better play if the company pays a dividend.  As such, you can receive a payment for ownership, where owning the commodity directly or through and ETF, you won’t receive one.

Investing in a producer that produces multiple commodities can also be a way to diversify across the sector, and help smooth any bumps in the road.