Futures Market | Commodity Futures Market Origins

Futures Market (Futures Exchange) Overview

Chat with a futures broker about Commodity Futures Market Origins

Commodity trading refers to the exchange of primary, or raw products. These products are traded in standardized contracts on regulated commodity exchanges.

Futures and Futures Options (such as S&P 500) are traded on regulated Futures Exchanges, where traders can trade standardized Futures Contracts.

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Commodity Futures Market Origins (U.S.A.)

Today's commodity markets had their beginning with the trading of agricultural products. Products such as corn, wheat, and cattle were widely traded as standardized instruments in the US in the 19th century. In order for a product to become a viable commodity market there must be a broad agreement on the variations of the product that make it acceptable for a specified use.

The development of commodity markets in the 19th century had a huge impact on interstate and international trade, leading to improvements in financing, transporting and warehousing of commodity products.

The modern commodity markets evolved from the trading of 'Forward Contracts'.

Forward Contracts

Forward contracts are negotiated between two parties with no formal regulation. These contracts specify the product quality, quantity, price, and date of delivery.

Futures Contracts

Futures contracts have the same basic features of a forward contract; the primary difference is that futures contracts are traded through an exchange. The modern futures contract began trading in Chicago in the 1840's. Chicago was a logical hub between farmers in the Midwest and the consumers in the East. Futures contracts also have a specified delivery day, settlement method, and point of delivery. Commodity futures are graded on various criteria to ensure they are suitable for delivery. Logically, different grades of a commodity will be valued differently, therefore is necessary to establish the grade to be traded beforehand. Commodity markets are standardized to meet a certain grade of quality.

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Commodity Futures Trading Commission (CFTC)

The CFTC is the federal agency which regulates the commodity markets to protect participants from fraud. The CFTC is responsible for maintaining fair and orderly markets, and enforcing market regulations. They also try to ensure that participants have the information to make informed decisions.

Hedging vs. Speculation

There are two types of participants in commodity markets: hedgers and speculators. Hedgers participate in commodity markets to protect themselves against adverse price movements in the products that they use for business. Hedgers can be producers (such as farmers or mining companies) or users (such as jewelers or oil producers). The producers are buyers in the futures market so that adverse price movements in their cash position are offset with profits in the futures market. Users are sellers in the futures market. The commodity markets exist as a way for hedgers to transfer price risk to speculators.

Speculators are not interested in taking or making delivery of the physical futures contract. They participate in the commodity market in hopes of making profit. In effect, speculators take the price risk from hedgers in exchange for the chance to profit from beneficial price movement.

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For more information, check out our Online Trading Futures Market Glossary