Commodities are raw materials, used in various industries, that can be sold by their producers on a commodity exchange. The original purpose of these exchanges was to provide an easy marketplace where such producers, and the users of their commodities, could do business. It also made it easier to obtain fair pricing, reduce favoritism among businesses and stifling of competition through pricing bias. What is sold on these exchanges, however, isn't really the physical commodity itself (except in certain market types). Rather, contracts for purchase of the commodities, at a stipulated price, are bought and sold by interested parties. This insulates these parties to some extent, particularly the producers, against price fluctuation due to varying supply of a commodity. The contracts sold guarantee the sale, at the specified price, in advance.
So what does all this have to do with investors you might wonder? Well, the trading of commodities is not restricted to the producers, and users, of those goods. Anyone with financial backing can purchase a commodity contract, making it a viable option for interested investors.
Like most everything, commodities' prices fluctuate and can turn a profit, if bought, or sold at the correct times. Investors can buy from these exchanges through brokers that are members of the exchange in question. Such investors speculate that the value of the commodity, and consequently the contract, will go up and they will be able to sell it for a profit when the market is right. These people have no real interest in commodity itself and will usually sell the contract before the date it is to be fulfilled.
Like most, if not all, other investment types, commodity market trading comes with its share of risks. The price of a commodity can fall, just as easily, as it can climb, based on a number of influential market factors - particularly suppy and demand. Other factors such as taxes introduced can also have an effect, however.
Say, for example, an investor buys into the oil commodity just before a large supplier, for whatever reason, is unable to provide oil for a period of time. The supply will fall drastically and the price of oil will likely increase substantially. In such an event the investor stands to make a huge profit. Conversely, if a new oil source were discovered by a company, the supply would increase and the price would fall. The investor could lose a lot of money, just as easilly, in this manner.
The commodity market, as shown above, can be a good investment device, similar yet different to the stock market, with the same basis of buying low and selling high. One notable difference is that profit is not dependent on a single company performing well, consistently, giving investors who dislike such a scenario a good alternative.
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