12 Features Of Online Commodity Trading And Futures Trading

Online commodity trading and futures trading are by-words today. But this was not the scene always. The original marketers belonged to the 1800s. They were just farmers who wanted to sell what they had grown on their agricultural lands. Crops would be harvested, and produce brought to the market for sale.

Not having the educational services available in modern times, they were not able to judge whether the goods that they had brought were sufficient or less in quantity. If the quantity was not sufficient for the buyers, the farmers lost an opportunity to make more money. If there was excess quantity, produce like crop products, meats and dairy products would have to be carted back home. In time, they would rot and spoil. Either way, whether there was a surplus or a deficiency, the farmer suffered losses.

Sometimes, a certain produce would be available off season, but not in as large a quantity as it would be if available during the regular season. Naturally, the products made from this were sold at high prices.

Ultimately, many heads got together to come up with the idea of a common or central marketplace. Farmers would bring their harvests here on certain days and sell them. The buyer could take them as immediate delivery (today, it is called spot cash) or order them as a future delivery (today, known as futures market).

The result of this endeavor was setting of standard prices for different commodities (in season and off season), plus giving an indication to farmers about demand and supply. Thus, spoilage of produce was brought to a halt and farmers no longer incurred huge losses. This can be seen as the stepping stone to the online commodity trading and futures trade that exists today!

Foregoing all that happened between now and then, looking at online commodity trading now as it exists, what are the considerations to be kept in mind if someone wants to go in for it?

(1) The first and foremost point regarding online commodity trading is having an intelligent grasp of how markets function (physical or online) and how contracts are drawn up for futures trade.

(2) Whether involved in online commodity trading or futures trading, there has to be a manufacturer of goods and a consumer of the same goods. One is the seller and the other is the buyer in the contract.

(3) Trade today has gone from agricultural produce and food products to much more, including financial instruments. So the trader has plenty of business options.

(4) Online commodity trading differs from futures trading in that goods may have to be handed over physically. A receipt is issued to the customer, enabling him/her to go to the warehouse and pick up the products.

(5) Another type of contract that has come into being is the futures contract. This has evolved from a forward contract, which is nothing but a buyer signing an agreement to pay for and purchase goods at a specified date some time in the future (generally, the time limit is three months from the date set on the contract). The goods will be delivered on that future date.

(6) According to the agreement, the buyer is getting a commodity not yet available. The price is of course, decided beforehand. Sometimes, the commodities are priced according to future values; stock market indices act as decision-makers for the value set on a particular commodity.

(7) Another aspect of futures trading is that neither the seller is the actual supplier of commodities, nor the buyer the actual user of the goods purchased. Only if the person is personally involved with the actual commodity purchased, will he/she provide and use it.

(8) Futures contracts are useful for both sellers and buyers because risks are minimized, plus the parties get the opportunity to indulge in a little bit of speculation. There is no exchange of physical goods.

(9) Different strategies are available for spot traders as well as future traders, to make use of rising and falling prices to their best advantage. These strategies can be classified as--spread, going short and going long.

(10) For the same commodity, the prices specified in two different contracts may not be the same. The businessman tries to use the price difference to his advantage. This is called a spread.

(11) Going short indicates that the trader is wondering if he/she can gain a profit from falling prices. The contract is therefore sold at a high price now, to be re-purchased at a lower rate in the future.

(12) The last strategy for online commodity trading or futures trading is going long. Here, the investor and the speculator sign an agreement where the buyer is ready to purchase the product at a pre-set price. He/she is anticipating that the price may rise in future, yielding further profits.