Introducing the financial markets
Trading commodities
Where are commodities traded?
Commodities are bought and sold on a number of exchanges specialising in a particular type of commodity.
LIFFE
New York Mercantile Exchange (NYMEX)
London Metal Exchange
ICE Futures US
Chicago Board of Trade (CBOT)
Contract size
Commodity futures are traded in contracts. Each commodity market has a standard size, set by the futures exchange where it trades. As commodities are often bought and sold in large amounts, the contract size also tends to be large.
Let's take gold as an example. The contract size for gold futures is 100 troy ounces. So if gold is trading at $1100 per troy ounce and you buy just one contract of it, your contract would be worth $110,000 (1100 x 100 ounces).
Small investors generally don't have access to such large amounts of money, so just like when trading forex, you can often trade commodity futures on leverage. Many exchanges and brokers also offer 'mini' contracts, which tend to be between 10% and 50% of the size of a standard contract.
It's very important to note that both standard and mini contract sizes vary widely depending on the type of commodity - so it's vital to check the contract size carefully before placing a trade.
Question
The contract size for silver is 5000 troy ounces. If you bought 10 silver contracts at $17.05 per troy ounce, and the silver price then rose to $17.15, how much profit would you have made in dollars?Correct
Incorrect
Your profit would be ($17.15 – $17.05) x 10 contracts x 5000 ounces= 0.1 x 10 x 5000
= $5000
What drives commodity prices?
As with all trading, the most important factor that affects commodity prices is the balance between supply and demand.
If, for example, there's a good cotton crop which boosts the amount in circulation - the price of cotton will decrease (assuming that demand remains the same). On the other hand, if clothes manufacturers and other companies using cotton need more of the commodity, but producers don't have the capacity to match this demand, the price will increase.
Other factors that drive commodity prices include:
The weather
Economic and political factors
The US dollar
Lesson summary
- Commodities are bought and sold on special exchanges in contracts
- Contract sizes vary depending on the type of commodity traded, but tend to be very large
- However, smaller investors can usually buy and sell commodity futures using leverage
- Commodity prices are often very volatile and are affected by supply and demand, the weather, geopolitical factors and the value of the US dollar
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