How to trade commodities

Online commodities trading can work for you, but you must follow some rules.

What is a “Commodity”? It is an article of commerce or a product that can be used for commerce, that is, it can be traded upon. Trading is carried out at an authorized commodity exchange. Prices of commodities in the global market are set by the market pulls and pushes when people carry out trading in them. Here are some commonly used terms that are used in the commodities trading market.

Contract: A term of reference describing a unit of trading for a commodity future. It is also an actual bilateral agreement between the buyer and seller.

Broker: A person who deals in buying and selling orders for a customer. A broker is also a person who actually executes orders on the trading floor of the commodity exchange.

Commission: The charges of a commission house for buying and selling commodities.

Commercial: A company that merchandises or processes cash grain and other commodities.

Buyer's market: The market condition in which there is an abundance of goods available and hence buyers can afford to be selective and may be able to buy at a lesser price.

Call option: The right to buy an asset at a specified price on or before a specified expiration date.

Cash commodity: The physical or actual commodity as distinguished from the ‘futures’. It is also sometimes referred to as ‘actuals’.

Cash market: Market for immediate delivery of and payment for commodities.

Commodity Exchange Commission: A commission consisting of the secretary of agriculture, secretary of commerce and the attorney general. These people have certain responsibilities under the Commodity Exchange Act.

Commodity Futures Trading Commission (CFTC): The federal regulatory agency established by the CFTC Act of 1974 to administer the Commodity Exchange Act.

Commodity pool operator (CPO): Individuals or firms in businesses similar to investment trusts or syndicates that solicit or accept funds, securities or property for trading commodity futures contracts.

Commodity trading advisor (CTA): Individuals or firms that issue analyses or reports concerning commodities, advise others of commodities or of the advisability of trading in commodity futures or options.