What is the 'Commodity Market'
A commodity market is a corporal or virtual marketplace for buying, selling and trading raw or primary products, and there are currently about 50 major commodity markets wide-reaching that make easy investment trade in approximately 100 primary commodities.
Commodities are divided into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (such as gold, rubber and oil), where soft commodities are agricultural products or live stocks (such as corn, wheat, coffee, sugar and soybeans).
BREAKING DOWN 'Commodity Market'
Commodities can be invested in numerous ways. An investor can purchase stock in corporations whose business relies on commodities prices, or purchase mutual funds, index funds or Exchange Traded Funds (ETFs) that have a focus on commodities-related companies. The most direct way of investing in commodities is by buying into a futures contract. A Future Contract necessitates the holder to buy or sell a commodity at a predetermined price on a delivery date in the future.
Major Commodity Exchanges
The major exchanges in the United States, which trade commodities, are domiciled in Chicago and New York with several exchanges in other locations within the country.
The Chicago Board Of Trade (CBOT) was established in Chicago in 1848. Commodities traded on the CBOT include corn, gold, silver, soybeans, wheat, oats, rice and ethanol. The Chicago Mercantile Exchange (CME) trades commodities such as milk, butter, feeder cattle, cattle, pork bellies, lumber and lean hogs.
The New York Board Of Trade (NYBOT) commodities include coffee, cocoa, orange juice, sugar and ethanol trading on its exchange. The New York Mercantile Exchange (NYMEX) trades commodities on its exchange such as oil, gold, silver, copper, aluminum, palladium, platinum, heating oil, propane and electricity.
Key commodity markets in regional centers include the Kansas City Board of Trade (KCBT) and the Minneapolis Grain Exchange (MGE). These exchanges are primarily focused on agriculture commodities. The London Metal Exchange and Tokyo Commodity Exchange are prominent international commodity exchanges.
Commodities are predominantly traded electronically; however, several U.S. exchanges still use the open outcry method. Commodity trading conducted outside the operation of the exchanges is referred to as the Over-The-Counter (OTC) market.
Regulation of Commodity Markets
In the United States, the Commodity Future Trading Commission (CFTC) regulates commodity futures and options markets. The CFTC's objective is to promote competitive, efficient and transparent markets that help protect consumers from fraud, manipulation and unscrupulous practices.