Trading Commodities - Commodity Types

Author: Amar Mahallati

There are several different types of commodities. Commodities are categorized so that it's easier to price compare, do research, and to make other trade tasks convenient. If you're an investor who wants to get involved in commodities trading, you need to know the basics. This is indeed one of the riskiest areas to invest in, but it can also be among the most profitable if you know what you're doing.

Energies

This area has been one of the most active in commodities trading recently. This category is comprised of products that are used to provide energy that will heat and power businesses and homes. The most common of these is petroleum and its byproducts, among them crude and heating oil, propane, natural gas, coal and some others, including subtypes or derivatives.

Each commodity has its own defined "tick" or price change; these are set by the exchanges. Each commodity also has a standard contract size. The standard contract size is the amount covered by a standard futures contract. For crude oil, for example, the amount is 1000 barrels. For wheat, it is 5000 barrels.

Grains

Wheat, oats, corn, rice and soybeans (although soybeans are not technically a grain) are agricultural products traded on various exchanges, including the well-respected Chicago Board of Trade, or CBOT for short. The exchanges trade the product as well as the futures and options contracts on these and other derivative products, such as bean oil.

Each of these products has its own tick or price change, standard contract size and unit. Some prices are listed in dollars per ton, such as with soybean meal. In this case, the standard contract size is 100 tons. It should be noted that most traders never see the actual commodity they trade in; you can see by the amount quoted here that there's a reason why.

Softs

Orange juice, cotton, sugar, cocoa and coffee are all what are called "soft" commodities. Many of these are traded on the Coffee, Sugar and Cocoa Exchange, or CSCE. It should be noted that 80% of the oranges grown in the United States are turned into frozen orange juice concentrate, and that it is the juice itself traded as the commodity, not the orange.

There's a relative newcomer on the New York Cotton Exchange, Frozen Concentrated Orange Juice, or FCOJ. This has been actively traded since the creation and widespread use and integration of inexpensive refrigeration, beginning after WWII.

Meats

Pork bellies, lean hogs and live cattle are traded on various exchanges, as are some derivatives. One of these exchanges is the Kansas City Board of Trade, or KCBT, which is the United States' livestock trading historical center.

One very unique commodity here is pork bellies, because the bacon that comes from pork bellies can't be substituted with a similar product. Their prices also usually interdependent with the price of grain, because hogs are fed a diet of corn and other grains. These prices are generally less volatile than they are within many other commodities.

Financials

Most traders invest in commodities futures or options rather than the good itself. Because of this, financial products are often listed on the same exchanges.

U.S. Treasury bonds futures are traded on the CBOT, as well as other places. A few indexes track stocks. The S&P index futures contract is one popularly-traded item.

It should be noted that some sites will list abbreviations showing the expiration month of the futures contract within the prices quoted. For example, these are shown are as follows, listed by quarter:

January - F, February -G, March - H

April - J, May - K, June - M

July - N, August - Q, September - U

October - V, November - X, December - Z

For example, you might see an item listed as PBH07; this is a pork belly contract that is due to expire in March of 2007.

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