Understanding the Raw Materials

The basic idea is that there is hardly any difference between a product from one manufacturer and the same product from another manufacturer.  A barrel of oil is basically the same product regardless of the manufacturer. forex trading platform in India. On the contrary, when it comes to electronics, the quality and characteristics of a particular product can be completely different depending on the manufacturer. Some traditional examples of products are:

• Cereals

• Gold

• Cow meat

• Oil

• Natural gas



More recently, the definition has been broadened to include financial products such as currencies and indices. Technological advancements have also led to the exchange of new types of goods in the market.

Commodities Buyers and Producers

The sale of commodities is usually done through futures contracts on exchanges, which standardize the minimum quantity and quality of commodities traded. For example, the Chicago Board of Commerce requires that a wheat contract be 5,000 bushels and indicates what types of wheat can be used to fulfil the contract.

There are two types of traders who trade commodity futures. The former are buyers and producers of commodities who use commodity futures for the hedging purposes for which they were originally intended. foreign exchange market today. These traders deliver or receive the real goods when the futures contract expires. For example, a wheat farmer who plants a crop can guard against the risk of losing money if the price of wheat drops before harvest. The farmer can sell wheat futures when the crop is sown and guarantee a fixed price for the wheat at harvest.

Commodity Speculators

The second type of commodity trader is the speculator. These are traders who only trade in commodity markets to take advantage of volatile price movements. These distributors never intend to manufacture or receive the actual product after the futures contract expires. Many futures markets are very liquid and have high levels of daily range and volatility, making them very tempting markets for intraday traders. Many index futures are used by brokers and portfolio managers to hedge risk. Since commodities are generally not traded alongside the equity and bond markets, certain commodities can also be used effectively to diversify an investment portfolio.



Commodities as a Hedge against inflation

Commodity prices typically rise when inflation accelerates, which is why investors often look to them for protection during times of high inflation, especially unexpected inflation. foreign exchange market When the demand for goods and services increases, the price of goods and services increases and the goods are used to produce those goods and services. Since commodity prices often rise with inflation, this asset class can often act as a hedge against the reduction in the purchasing power of the currency.

What Determines The Prices of Raw Materials?

Like all assets, commodity prices are ultimately determined by supply and demand. For example, a booming economy could lead to higher demand for oil and other energy resources. If the supply of these goods had not increased sufficiently before this increase in demand, the price of these goods would increase. best broker in India for forex. Conversely, economic shocks that temporarily suppress demand for a given product can cause the price of that product to drop rapidly, especially if manufacturers of that product were previously unable to reduce their supply. When everything else is equal, commodity prices also tend to rise when investors expect higher inflation on the horizon, as commodities are often seen as a hedge against inflation.

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