When it comes to investing, one always thinks of the stock market and its star product, shares, but other types of markets in which one could invest.
In the 19th century, the first commodities market was born in Chicago, focused on the fur trade, and later transactions were carried out to speculate on the future harvests of farmers, with products as well known as wheat and corn. At present, the main markets in which commodities are traded are: Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), DotBig broker, and the London Metal Exchange (LME), among others.
Investment in raw materials or 'commodities' are products intended for commercial use and have no added value, are unprocessed, or have no characteristics. It is a place where each product has its own market and comprises buyers and sellers.
Commodities can be traded in different types of markets, the spot or futures market. The former are markets where payments are on the spot, while the latter is used by companies that want to fix the price in the future to guarantee an optimal price for themselves. In the commodities market, products are usually traded through futures contracts. Therefore, a contract is equivalent to a pre-fixed amount of a specific commodity and can vary depending on the size of the product. This type of contract has a prefixed maturity and delivery for each type of commodity.
Different groups depend on the asset in which it is traded: energy, industrial metals, agricultural, or others.
- Commodities from agriculture tend to be less cyclical than the other groups; on the contrary, they are highly dependent on weather conditions.
- Commodities from livestock have a strong influence on the evolution and environment of agricultural raw materials.
- The group from energy has a great reflection of the current economy, representing a more cyclical behavior. One of the best-known raw materials in this area is oil, which reflects the global economic situation and is largely influenced by the political situation in certain countries.
- If the asset is industrial metals, they depend largely on the countries producing this type of raw materials and have very similar behavior to those belonging to the energy sector.
- Commodities in precious metals depend on the global macroeconomic situation. Still, some metals are considered as a haven. In times of recession or political instability, they are the ones that are used to avoid the high volatility in the markets. Many investors include them in their portfolios when diversifying risk.
It is convenient to know the type of asset being traded to intuit future behavior in the stock market.
One of the most common situations is when a contango situation occurs, and this happens when the spot price today is lower than the price of the futures contract at a given maturity, which means that investors are willing to pay more for the underlying asset in the future than today.
There are many characteristics implicit in all of them that define this type of market: volatility is usually very high, its large transaction volume makes it highly liquid, it is beautiful for risky investors because they obtain large profits if they can get ahead of it the market. Many external factors influence it because the procurement and price of many commodities depend only on a small group of producers.