COMMODITY EXCHANGE

DEFINITION OF A COMMODITY

In commerce, a commodity refers to a marketable item produced to satisfy

wants or needs. Economic commodities comprise goods and services.
Commodity is specifically applied to goods. It is used to describe a class of
goods for which there is demand

MEANING OF TRADABLE COMMODITIES

Meaning: Tradable commodities include basic resources and agricultural

products such as iron ore, crude oil, coal, salt, sugar, tea, coffee beans, soya
beans, aluminium, copper, rice, wheat, gold, silver, palladium and platinum
etc.

TYPES OF TRADABLE COMMODITIES

(1) Soft and hard commodities: These are goods that are grown such as crops
while hard commodities are the ones that are extracted through mining.

(2) Energy commodities: There is another important class of energy

commodities which includes electricity, gas, coal, and oil. Electricity has the
particular characteristic that it is usually uneconomical to store; hence,
electricity must be consumed as soon as it is produced.

All these commodities mentioned above are collectively regarded as tradable

commodities because they are items which can be traded (imports and
exports) between one country and another. It involves buying and selling
with the purpose of making profits.

DEFINITION OF COMMODITY EXCHANGE

A commodity exchange is an exchange where various commodities and

derivative products are traded. Most commodity markets across the world,
trade in agricultural products and other raw materials (like wheat, barley,
sugar, maize, cotton, cocoa, coffee, milk products, pork bellies; other
metallic commodities include gold silver, diamond, iron ore and copper).
CONDITIONS NECESSARY FOR TRADING

The following are the conditions necessary for trading

1. Knowledge of the product: You must know the product you want to
trade in.
2. Familiarity with customers’ desires: You must be familiar with your
customers’ desires or buying culture.
3. Need to carryout feasibility study: You must carry out a feasibility study
of the area you want to start the trade, i.e. you must know how close
your products are to the people.
4. Familiarity with mode of transport: You must be familiar with the type
of transport network you want to use.
5. Familiarity with computer: You must be familiar with a computer or
knowing how to trade online.

REQUIREMENTS FOR TRADING IN A COMMODITY EXCHANGE

Trading also involves a sequential method of arranging the tradable

commodities in order to ensure the delivery of quality commodities to the
customers. These trading requirements include:

(1)The item must be capable of being sold by description.

(2)Demand must be large and supply must flow naturally to the market.
(3)The commodity must be susceptible to standardisation of grading.
(4)The commodity must not be a perishable one that could be subject to
deterioration.
(5)The traders must be bona fide (real or genuine/ absence of fraud or
deception) members of the exchange and must not engage in insider
trading.

TYPES OF TRADING ON COMMODITIES

There are two major types of trading on commodities. They are:

 (1)Spot trading: This involves the system in which buyers pay
immediately they receive the goods under special arrangement and
conditions. The seller may receive part payment before the commodity
is delivered (i.e. bill for collection) or full payment made after the
commodity is received and confirmed to be all right and in good
condition (i.e. in the form of letter of credit).

(2)Forward futures: Commodities” exchanges may also trade on future

contracts, it is a customizable agreement between two parties to buy
or sell a commodity at a set price on a future date.

Speculators and investors do buy and sell the future contracts in an

attempt to make a profit and provide liquidity to the system.

 Forward contract have a default risk because the other party

might not fulfil their obligation
 The financial institution that initiates forward contracts have a
higher risk of settlement and default.

METHODS OF TRADING ON COMMODITIES EXCHANGE

There are three methods of trading on commodities.

(1)Open outcry: This is a method of shouting items of sale on commodity

market with hands raised by the buyers to signify intention to buy.

(2)E-trading: This is a method where buyers and sellers of commodities

are brought together through electronic platform. The bargain is struck
without negotiations.

(3)Pit trading: This is the method of trading where buyers and sellers
meet in a particular area of the trading floor to reach a bargain through
an open outcry system.

BENEFITS OF COMMODITY EXCHANGE

1. It provides the opportunity for industrial buyers and sellers to meet and
manage their price risks better.
2. It ensures that farmers sell their products close to the market price by
publishing future prices daily.
3. It encourages continuous production and removes the need to look for
buyers on the part of producers. It increases agricultural production
4. Import/export competitiveness. As a result of availability of information
from the market, all parties know the market trend and requirements.
5. It encourages standardisation of products: this is a system of making
products or services consistent across different regions, market or
production batches. It ensures that products meet certain standards for
quality, design, appearance in the market
6. It generates foreign exchange earnings.

CONSTRAINTS TO COMMODITY TRADING

The major constraints to commodity trading in Nigeria are:

1. Inadequate supply: Majority of the commodities produced are always in

short or inadequate supply. This tends to cause shortage or inadequate
supply to the market, thereby leading to scarcity and increase in the
prices of such commodities
2. Poor storage: Poor storage of commodities, e.g. power problem (that is
Electricity), generally leads to wastage and poor prices. Poor storage
does lead to low prices and poor quality of commodities.
3. Bad weather: Bad weather such as flooding, drought, etc. affects
agricultural production and this may lead to poor harvests and low
markets for these products.
4. Activities of middlemen: wholesalers and retailers do create artificial
scarcity and high cost of commodities and these go a long way towards
affecting the price of these commodities on getting to the final
consumers.
5. Ethical issues: Many marketers lack the manners and other
considerations marketing certain commodities. Their manners and
attitude do result in bad marketing of tradable commodities. Some
religious beliefs may prevent certain commodities from being sold e.g.
Islam forbids any activities related to trading or production of pork, eg.
Meat of pigs.
6. Inadequate knowledge on commodity exchange: Many traders or
investors do not have adequate knowledge of the working of the
 commodity exchange. This tends to slow down their activities or they
do different things which may not benefit commodity exchange
activities
7. Corrupt officials: There are so many corrupt officials that make it
difficult for people to trade effectively by virtue of wanting to be bribed
before a business can be transacted.
8. Bad government policies: Every government enacts various policies
that tend to work against commodity trade in the country. In other
words, these policies are not business friendly because they frustrate
the traders in carrying out their businesses
9. Fraudsters: There are many fraudsters who are creating difficulties for
genuine traders in the business.
10. Poor road network: The country is plagued with so many poor
road networks. Most of these roads are in bad states. This prevents the
smooth flow of transporting goods or commodities from one region of
the country to the other,

SIMILARITIES AND DIFFERENCES BETWEEN COMMODITIES AND STOCKS

Commodity refers to a marketable item produced to satisfy wants or

needs. Commodities are goods initially sold by the parties who produce
them.

Stock refers to the bundle of shares or mass of capital which can be

transferred in fractional amounts. When a company wishes to make itself
available to ownership by outside parties, it will often issue shares of
stock. Each person buying a stock owns a piece of the company.

SIMILARITIES BETWEEN COMMODITIES AND STOCKS

1. both can be bought and traded only.

2. They require large sums of money to trade with.
3. Both can be bought from the same source.
4. The profits from trading of stock and commodities are usually high.

DIFFERENCES BETWEEN COMMODITIES AND STOCKS

Stocks and commodities differ in a number of ways. For one, many
commodities, such as food items, are perishable, meaning they can be
resold in a limited number of times. For another, stocks commonly entitle
their holders to receive dividends, which is the profits made by the
company. Unlike stocks, commodities do not generally produce income.
However, like stocks, they do increase or decline in value based on supply
and demand.