What is Commodity Trading?

Commodity trading is the process of purchasing a commodity for a set price with the hope to sell it later down the track for a potential profit. There are two forms for commodity trading that revolve around cash contracts and futures contracts. Cash contracts are also known as physical contracts. This requires the buyer to pay cash up front, which means that you must pay the contract in full on receipt of the contract. You can then go forth and sell the contract to someone else which transfers ownership of the contract and the goods contained therein. This generally considered the least risky of the two commodity trading format as you are not reliant on the future viability of the company as much as you would be by investing in their future.

image You can also break up the process of buying physical contracts into another two subcategories which are spot and forward transactions. Spot transactions are reliant on the payment by the buyer on delivery of the goods specified in the contract. Forward transactions are reliant on cash contracts that are specific to the physical market. This is akin to getting the goods in credit with a predetermined time frame in which to pay for the goods.

Commodity trading is fickle territory and it takes some knowledge of the market you are entering before you do so. Future contracts are reliant on paying up front for a contract or products that will be forthcoming at a later date. It is like waiting on a back order (if you have ever ordered something online and found the supplier is out of stock you will know what I mean). Because future contracts are reliant on the long term survivability of the company in order to ever see your contract or products it is generally considered a much riskier investment.