Why are commodities so essential?

Why are commodities so essential?

Some raw materials are especially relevant in economic activity. Oil, sugar, gold, coffee, copper, coal, rubber, or wood are examples of core elements linked to commercial uses. These and other essential goods are in use as a basis to negotiate in the financial markets, we call these goods commodities.

Professional traders trade commodities regularly

When we think of the stock market, many entities come to mind, such as multinationals, banks, investment funds, etc. Also, they are part of the different international stock markets.

Those who negotiate with these goods know that they are very volatile products since their price changes depending on many factors. For example, a good or bad corn harvest becomes a determining factor in negotiating a price. 

Like any other financial product, this one also runs some risks. There are risks related to transportation, commodity logistics, or payment methods. Price volatility is another risk in these operations. If the commodity price falls, a buyer could consider not fulfilling the contract and looking for a cheaper transportation system.

Commodity trading is a very specialized sector

Analysts should be aware of each commodity’s upward or downward trend and inform themselves on all news concerning the market demand for each of these commodities.

If the commodity is in limit, its price tends to increase. Conversely, if the commodity is abundant, the price tends to decrease.

The transactions occur in two types of markets: the spot market and the futures market. The first one refers to the current price of a product, and the second one refers to the expected cost of a product.

Soft and hard commodities

There are two types of commodities: soft and hard commodities. Soft commodities are mainly corn, coffee, or soybeans. 

Different metals are examples of hard commodities.

It is possible to acquire these essential goods in the financial system, depending on their price and quantity.

Depending on each commodity’s supply and demand, any person can buy or sell any of these goods by contacting an intermediary who carries out the operations between the interested person and the financial market. Trades and brokers offer platforms to their clients so that they acquire the commodity they want.

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