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Commodities Trading Essentials

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Contracts for Difference (CFDs)

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A type of derivative trading that allows traders to speculate on commodity price movements without the need to own the underlying assets.

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Spot Price

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The current market price at which a particular commodity can be bought or sold for immediate payment and delivery.

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Futures Contract

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A legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.

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Commodities Exchange

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A legal entity that determines and enforces rules and procedures for the trading of commodities and related investments, such as commodity futures and options.

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Hedging

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A risk management strategy used to reduce or eliminate the risk of price movements of commodities by taking an offsetting position in a related futures contract.

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Speculation

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The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain.

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Contango

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A market situation where the futures price of a commodity is higher than the spot price, typically due to the costs of storage and insurance associated with holding the commodity until delivery.

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Commodity Index

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A financial instrument that measures changes in the price levels of a basket of related commodities.

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Bull Market

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A financial market of a group of securities in which prices are rising or expected to rise. In commodities, it represents a period where the prices of commodities are rising.

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Backwardation

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A market condition where the future price of a commodity is below the spot price, often occurring when the commodity is in high demand and short supply.

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Physical Delivery

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Refers to the act of delivering the actual physical commodity to the buyer at the expiration of a futures contract.

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Margin Call

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A broker's demand on an investor to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin.

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Paper Trading

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A simulated trading process where beginner traders practice investing without using real money.

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Bear Market

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A market condition in which the prices of commodities are falling or are expected to fall.

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Mark-to-Market

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The process of daily settling of gains and losses in futures markets by adjusting the margin account to reflect the current market value of the futures contract.

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