- A peculiarity about trading commodities is that you can trade either the cash market and/or the future market
- The cash market is where commodities are traded for immediate delivery and are therefore quoted at their current cash prices
- The futures market is where commodities are traded for delivery at a pre-arranged time in the future and at a pre-arranged price
A peculiarity about trading commodities is that you can trade either the cash/spot market and/or the future market. As a CFD trader, it can be helpful to understand the intricacies of each kind of market as these inform the underlying values of these instruments.
The cash market
The cash market (otherwise known as spot market or physical market) is a market where commodities are traded for immediate delivery and are therefore quoted at their current cash prices. As such, the cash market is affected by economic events that affect the immediate supply/ demand of commodities.
The futures market
The futures market is where commodities are traded for delivery at a pre-arranged time in the future and at a pre-arranged price. The majority of commodity trades occur in the futures market, as businesses prefer to plan ahead and mitigate the risk that a commodity’s price is drastically different to what they forecast at the time that they need to buy or sell it. The most common futures contract pricing is for three months in the future. Other popular futures contracts are for 1, 2, and 6 months, although you can find contracts for years in advance, however there is less liquidity in these contracts.
Much like cash markets, futures markets can be affected by the same events as the finitude of commodities and their complex supply chains usually mean that current economic events can be expected to be felt in the future. Interestingly, it has been shown that future markets are slightly more volatile, due to the combination of the longer timeframes and the uncertainty that these economic events impart on a commodities price. The use of leverage and speculative trading in futures trading is also a contributing factor to this volatility.