Any layman would have heard of the term “Stock Market”. As the name connotes, it is normally associated with investments and company stocks. While this is common and probably the most popular form of trade investment, there is also such a thing called “Commodities Trading”. Commodities trading deals with agricultural products, such as wheat, malt, sugar and corn, as well as metals, such as gold and contracts based on the purchase and trade of these goods, as opposed to the stock market which deals with all types of financial instruments, such as stocks, government securities, interest rates and indexes.
With the advent of technology, both stock and commodities trading are now traded online. For purposes of discussion, we will focus on commodities trading online. Online commodities trading actually has its roots from eighteenth century Japan. Though some researchers argue that men traded in Persia in the years before Christ, citing evidences of primitive trading contracts for various goods. New York and Chicago are, however credited for bringing commodities trading in the United States of America during the mid-nineteenth century.
The industrial revolution ushered in new technology that include more effective tools, a number of which are capable of creating more food. This new efficiency demanded more agricultural storage, transport, and more competent circulation of produce. At first the markets could handle the rising demand for food, but as volume grew, the commodity markets with uniform pricing and delivery became progressively more significant. A system was then developed to cope with the hoarding of goods that happen during harvest times and with the scarcity that occur before the harvest.
With the new system, buyers could arm themselves from price irregularity by closing a deal for a certain commodity that is fixed at a particular price before they have a need for it. The contract based on this system is now known as futures. The place where all these agricultural products as well as contracts based on the agreements between buyer and seller are being traded are called commodities exchanges.
Prior to the electronic age, there are certain places designated as commodities exchanges, however, these are now conveniently available on the net. Online trading are also referred to as screen-based or electronic trading.
In online commodities trading, customers send, buy or sell orders from their computers to an electronic marketplace offered by the exchange. There is no need to have brokers act in behalf of the customers, as brokerage approvals to trade are generated electronically. The online trading screen now takes the place of the trading pit.
An advantage for online commodities trading is price transparency since the top five current bids and offers are posted on the trading screen, in full view of all electronic market participants. These days, a meatshop owner in Germany can easily match a bid with a cattle raiser in New Zealand!
As with any investment though, an uptick in a certain commodity where one places his money could generate for him huge earnings but a drop in prices would provide the same loss. For example, assuming prices for meats would go up in the succeeding three months, a meatshop owner decides to place an order for one cow from a cattle raiser who sells it for $5.
This is to be delivered to the meatshop owner three months from when the deal is closed. They both sign a contract.The following day, cow prices rose to $6. The cattle raiser in this case loses $1 while the meatshop owner gains $1. Multiply the earnings or losses from the above example a hundred times for huge orders and you get the picture. Any potential investor should therfore be warned that investing on these markets is very risky.
There are various trading sites available for online commodities trading. A minimum fee entitles an investor to create an account that entitles him to researches and technical analysis on listed companies, apart from actually trading online. Most have help desks and other tools necessary to assist an investor in coming up with the best possible judgment. As online commodities trading are highly reliant on market conditions which vary from time to time, critical analysis and observance of business trends are highly encouraged.