A commodity exchange like the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME) or the London International Financial Futures and Options Exchange (LIFFE) trade commodities, including raw materials, agriculture products, currencies, stock indexes, and derivatives. Derivatives are stock options that are derived from an underlying stock (futures and options).
The Moscow Exchange (MOEX) trades in all type of assets, including the money market, precious metals, derivative, foreign exchange (FOREX), equities and bonds.
The Chicago Mercantile Exchange is the first world commodity exchange. Unlike the other stock exchanges, it is not evaluated using total market capitalization criteria or the number of companies listed on its exchange. The trading volume on the exchange is huge. The trading volume each month exceed $2 trillion. Because the CME offers a larger range of transactions than any other market, more trading occurs.
The Chicago Mercantile Exchange is a part of a conglomerate called the CME group that includes many smaller exchanges including the Chicago Board of Trade (CBOT) and as well as the New York Mercantile Exchange (NYMEX). The NYMEX does not offer the same range of goods and is behind the CME in the number of trades. The NYMEX trades in many resources, including petroleum. The CME Group has the highest trading volume in indexes, currency derivatives, fuel, agriculture commodities and more. In fact, the CME Group performs as well as the NYSE Euronext does on the stock market.
The Chicago Mercantile Exchange was founded as a way to trade agriculture commodities in 1874. Originally, this exchange was called the Chicago Butter and Egg Board; however, in 1919, the name was changed to the Chicago Mercantile Exchange. The exchange was used to trade future purchases of perishables because they could not always be instantly delivered; therefore, the market held people's "spots" for these goods in the future. By the 1960s, the type of contracts had evolved and began offering futures on live cattle and frozen pork worldwide. Then, in the 1970s and 1980s, the CME began trading options and futures on stock indexes like the S&P 500 and national currencies.
When this change occurred, the CME was no longer a strict commodity exchange. It now had begun offering trades in derivatives on the stock market and currency. The CME was popular for speculators looking for massive profits in a wide array of assets (from grain to currencies). It should be noted that even with these changes, the Chicago Mercantile Exchange's primary focus remains on agriculture commodities.
In the stock markets, the line between an investor and a speculator is thin. Many of today's investors participate in one form or another of speculating. The CME is entirely different as trades are more "real" and are not based on "speculation" the way other markets do. The purpose of the CME is to provide essential raw materials, food, and fuel to supply the everyday needs of industries and countries around the world.
A stock can be held on for years or sold as soon as it is purchased. With a commodity purchase like a load of grain or a barrel of oil, you would have a more difficult time selling the actual grain or oil. Online traders do not buy goods and products; instead, they buy derivatives (futures and options) of these goods. The derivatives can be traded just like any other securities.
Trading in futures and options is riskier than traditional stock trades; however, the rewards can be greater, and you can reap those reward quicker. Trading futures and options do require more knowledge, and you must be able to determine the risk involved in each trade. This type of trading is not recommended for those who think stock trading is like gambling. You must use a variety of mathematical formulas to help you determine the profitability and risk of each trade.
When you are trading in commodities, you must remember that those trades will be fulfilled. This means if you do not want a barrel of oil delivered, you must resell your derivative contract before delivery time. There are many helpful sites available where you can read about futures and option and how to adequately invest in the commodities market.
The most successful future for currency on the CME is the currency exchange of the Euro and US dollar (EUR/USD). In a single day, there are more than 185,000 future currency contracts of the Euro/USD made totaling $25 billion. The next most popular set of currency exchanges are the US dollar and the Japanese Yen (JPY/USD). Each day, there are more than 132,000 future currency contracts of the JPY/USD that totals approximately $16.6 billion.
Another common trade on the CME is the futures and options on the S&P 500. These futures and options contracts have a monthly revenue of $3 billion and more than 2 million futures, and options are made daily.
The most popular product of agriculture commodities is maize (corn). Approximately 600,000 futures contracts are made on 3 billion bushels of maize. If considered on a monthly scale, the sum of these contracts would be approximate $5 billion and more than 3 cubic kilometers worth of maize. Expand that to a year, and the amount of maize needed to fulfill the contracts is 40 cubic kilometers! Most of the trades made are done virtually as contract resales between commodity traders. To be able to deliver all the maize sold in a year, farmers would have to produce multiple times the amount of grain that is produced around the world.
Wheat is the next most common future traded on the CME. Wheat is the number one crop in Russia; however, it only accounts for a third of the futures on maize. This means that the volume of sales of wheat would only be one cubic kilometer a month and 12 cubic kilometers a year. Remember these are virtual figures and trades. The total amount of wheat harvest worldwide is less than one cubic kilometer.
The major online brokers will give you access to the Chicago Mercantile Exchange. However, you should remember that trading derivatives are more complicated than trading stock shares. Furthermore, many terminals do not support options trading. If you are going to trade this type of option, brokers may recommend you use a QUIK terminal. Brokers often have separate modules such as Option Trader or Option Board; however, these modules are harder to understand and use.
Another thing that you should be aware of is brokers may require you to open two different accounts if you will be trading in derivatives and stocks. European brokers often allow different types of trades and assets to be held and traded from one account.
The last thing to be aware of is commissions. The commissions among the various brokers working on commodity exchanges such as the Chicago Mercantile Exchange can vary greatly- from a couple of cents per contract to several dollars per contract. So, it is essential you understand your broker's commission rates on the commodity exchange.
As you can see, there are many things to consider when purchasing commodities on the Chicago Mercantile Exchange and other commodity exchanges. You must first spend time learning about futures and options and how to determine the risk and the reward of each trade. You will also need to determine if you will need a separate account for your stock trades and your commodities trades. Finally, talk with your broker to determine the terminals you should use and the commission rate your broker will charge for trading on the commodity exchange.
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