Commodity Futures

If you understand a commodity future, you will have a much easier time expanding into other areas of commodities investment, and this Commodity Tips will be helpful to successfully invest in those as well.

what is a commodity future?

Commodity futures are agreements of contracts that are utilized to purchase or sell a specified amount of a given commodity. The agreement will commit the buyer and the seller to a fixed price that will be in effect on a specified future date. When this future date arrives, the buyer is expected to have paid the agreed upon price for the futures, and the seller will have delivered ownership of the commodities to the buyer.

Commodity futures are based on physical commodities that include items such as gold, silver, other precious metals, and grains. Various types of food items, such as corn or pork bellies, are also considered to be commodities. Commodity futures are based on the perceived worth of the goods today and at some future point in time.

Futures on these types of goods recognize two key factors. First, the physical commodity already exists. Second, there is an anticipation on the part of the buyer that the commodity will increase in value over time. When this is the case, a buyer will choose to enter into a commodity future agreement with a seller. The price that is ultimately paid is considered to be sufficient for the seller to make a profit from the venture. At the same time, the buyer is anticipating that the value of the goods will rise beyond the sale price and thus ultimately generate a return on the investment.

Commodity Futures Trading Commission (CFTC)

The Commodity Futures Trading Commission, an independent regulatory agency under the direction of the Senate Agricultural Committee, regulates trading on the 11 U.S. futures exchanges which offer active futures and options contracts. It reviews the terms of proposed futures contracts, and registers companies and individuals that handle customer funds or give trading advice. The commission regulates the activities of commodity exchange members, public brokerage houses (futures commission merchants), commission-registered futures sales people and associated persons, and commodity trading advisers and commodity pool operators. The commission ensures that the futures trading process is fair and that it protect both the rights of customers and the financial integrity of the marketplace.