Getting Started in Commodities

Chapter 2

How the Commodities Markets Work

If you mention commodities in conversation, most people picture a trading floor packed with screaming, wildly gesturing traders. This isn't surprising. Most of us know of commodity trading only through news reports or movies punctuated with colorful pictures of the floor action from Chicago or New York. Commodity traders, by nature, are supposed to call attention to themselves by sight and sound. By doing so, they're more likely to find another trader with whom they can transact business. So what are all those people in the funny jackets actually doing?

First of all, it's important to know that floor action represents only a part of modern commodity trading. There's an ever-growing proportion of trading that takes place electronically nowadays. But let's not get ahead of ourselves. To understand how the modern commodity markets work, we first need to review a bit of history. Just how and why did commodity trading develop?

The Need for a Commodities Market

If you're a wheat farmer in southern Illinois, you can find a bevy of potential buyers for your crop in Chicago among its flour millers, cereal manufacturers, and glue factories. Naturally, Chicago's industrial consumers are interested in buying wheat at the lowest obtainable price, while you want the highest possible price for your crop.

spot market

same as the cash market. It is the ...