Common Terminology in Futures and Commodity Trading

Commodity Markets

A commodity market is a market where generic movable products are bought and sold with contracts. Examples of commodities are: corn, wheat, coffee, pork bellies, cocoa, soya beans, oats, live cattle, crude oil, natural gas, gold, silver and so on.

Contract

Buying and selling of commodities is done with contracts. These contracts state exact rules, including descriptions, quantities, unit price, and delivery times.

Trading

Trading means buying and selling contracts.

Futures trading vs Commodity trading

Commodity trading and futures trading is the same thing. When you are trading in commodities you are trading in futures.

The Commodity Exchange

Commodity exchange is a central place where the buying and selling commodities take place. The biggest commodity exchange in the world is he Chicago Board of Trade (CBOT). There are also quite few around the world.

Mini-Contracts

Trading mini-contracts is an alternative to trading standard contracts and is smaller in quantity, ranging between one-fifth and one-half the quantity of a standard contract. Mini-contracts are traded in Chicago on the MidAmerican Commodity Exchange (MidAm).

Standard Contracts

Standard sizes of futures contracts are most of them related to the specific product. Example:

– a contract of corn has 5,000 bushels

– a contract of gold has 1,000 ounces

– a contract of lumber has 160,000 board feet

Contango

Contango describe the carrying costs inherent in different price months for the same commodity. For example a commodity to be delivered in eight months has more overhead costs (due to storage price) compared with a commodity be delivered in two months.

Trading Months

Every commodity has specific trading months and is not all the same. For example: Crude oil has trading every calendar month. Soya beans have in January and every second month.

Spot Market

It is also known as the cash market in futures which means delivered and paid for “on the spot” or immediately.

The spot month is the present month.

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