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Commodities Trading Essentials
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Contracts for Difference (CFDs)
A type of derivative trading that allows traders to speculate on commodity price movements without the need to own the underlying assets.
Spot Price
The current market price at which a particular commodity can be bought or sold for immediate payment and delivery.
Futures Contract
A legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future.
Commodities Exchange
A legal entity that determines and enforces rules and procedures for the trading of commodities and related investments, such as commodity futures and options.
Hedging
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.
Speculation
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.
Contango
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.
Commodity Index
A financial instrument that measures changes in the price levels of a basket of related commodities.
Bull Market
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.
Backwardation
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.
Physical Delivery
Refers to the act of delivering the actual physical commodity to the buyer at the expiration of a futures contract.
Margin Call
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.
Paper Trading
A simulated trading process where beginner traders practice investing without using real money.
Bear Market
A market condition in which the prices of commodities are falling or are expected to fall.
Mark-to-Market
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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