Commodities are, in short, stock and bond indexes or currencies that are traded on a national or international level. In the world of commodities, questions often arise for the uninitiated. It can be confusing to navigate. Here are a few frequently asked questions that come up for an individual new to commodities trading.
STOCK EXCHANGE AND FUTURES EXCHANGE, IS THERE A DIFFERENCE?
In a stock exchange, partial ownerships (or stocks) are bought and sold for a company that issues the stock. A futures exchange is of contracts rather than stocks. These contracts consist of quality, time and date of exchange, and quality of a commodity such as soy beans or Treasury bonds. Since these are standardized contracts, the variable in this equation is price, which is usually “discovered” on the exchange floor at the time of trading.
THE FUTURES MARKET, IS THERE A NEED?
Goods and services come at a price, which is paid by the consumer. To reduce the cost to the consumer, a company that successfully trades in futures will reduce their own cost and effectively be able to lower price.
THE FUTURES CONTRACT, WHAT IS IT?
A futures contract is a standardized contract consisting of type, quality, quantity, and time and place of delivery for a commodity. Again, the only variable in this is the price, which is then determined on the exchange floor.
WHAT, THEN, ARE OPTIONS ON A FUTURES CONTRACT?
An option on a futures contract is the right to sell a contract at a certain price for a limited time. This includes “calls” and “puts”.
A call is the option to buy a contract, a put is an option to sell a contract. Both of these are set at a particular price, and is subject to be bought or sold on or before the expiration of the individual contract.
THE “PITS“, WHAT ARE THEY?
The trading pits are octagonal shaped platforms on the trade floor. These platforms have stairs that sink into a “pit”. The shape is to allow a sale to be conducted in an orderly fashion, where both buyers and sellers can see and communicate with each other.
HOW IS A CUSTOMER’S INVESTMENT PROTECTED?
Through the careful regulation and amendment of an exhaustive list of rules, officials oversee the transactions to create a fair, yet competitive environment for trading.
In today’s commodity climate, there are many with an interest in learning trading, whether it be stocks or futures. An individual with keen observation and a quick mind can easily learn to compete in this fun and competitive arena.