The Role of Commodity Exchanges in Investment Trading
Commodity exchanges provide investors and traders with the opportunity to invest in commodities by trading futures contracts, options on futures, and other derivative products. By their very nature, these products are extremely sophisticated financial instruments used only by the savviest investors and the most experienced traders.
Although independent traders can and do trade the futures markets, the majority of players in the futures markets are large commercial entities who use the futures markets for price hedging purposes.
For example, Hershey Foods Corporation is an active participant in cocoa futures because it wants to hedge against the price risk of cocoa, a primary input for making its chocolates. If you decide to trade cocoa futures contracts, you should remember that you’re up against some large and experienced market players.
At the end of the day, the commodity futures exchanges are your gateway to the futures markets; in fact, they are the commodity futures markets. However, because of the fierce competition in these markets and because of the complexity of exchange traded products, you should only trade directly in the commodity futures markets if you have an iron clad grasp of the technical aspects of the markets and have a rock solid understanding of the market fundamentals.
If you don’t have either, you should stay out of these markets because you could be subjecting yourself to disastrous losses. That said, you can hire a trained professional with experience trading commodity futures to do the trading for you.
Commodity futures exchanges serve a very important role in establishing global benchmark prices for crucial commodities such as crude oil, gold, copper, orange juice, and coffee. The exchanges are crucial for both producers and consumers of commodities. Producers, who use commodities as inputs to create finished goods, want to shelter themselves from the daily fluctuations of global commodity prices.
Producers may use the commodity exchange to lock in prices for these raw materials for fixed periods of time using futures contracts. This process is known as hedging. Similarly, traders may use the commodity exchange to profit from these fluctuations. This is sometimes known as speculation.