We can define commodity exchange as an entity. It is usually an incorporated non-profit association, which determines rule, procedures and enforces these rules and procedures for the trading of commodities and related investments, like commodity futures. Traders and investors prefer taking commodity tips before investing.
Commodity exchange can also be referred to a physical center where trading takes place. We can say that an open and organized marketplace is a commodity exchange market, where ownership is subjected to standardized quantities of certain commodities are traded by its member and these are traded at a specified price and to be delivered on a specified date.
Everything is done by following rules and procedures, Hence, the samples of commodities are examined and graded physically by following the underlying rules. As per the rules the physical delivery of the commodity also takes place, but the physical delivery of the commodity rarely occurs because the delivery contracts are usually exchanged or closed out i.e.traded out before their expiration date.
The modern commodity markets trade many type of investment vehicles. An investment vehicle can be defined as a product used by investors with the intention of gaining positive returns. The commodities, which are hard goods may be bought and sold on a commodity exchange in three types of markets: cash, futures and options.
Commodity exchanges are divided roughly into three main types: metals exchanges, fuels exchanges, and soft i.e agricultural commodity exchanges. Whereas other exchanges deal in currencies and commodity indices.
Importance of commodity exchange.
The commodity market has been traded for around more than 150 years in U.S. Commodity exchanges serves a vital role to the economy. The commodity exchanges possess great importance because it provides investors and traders with the opportunity to invest in commodities by trading futures contracts, options on futures, and other derivative products.
The main purpose of commodity exchanges is to provide a centralized marketplace for investors and traders. We can say that this provides the facility to buyers and sellers, by which commodity producers can sell their commodities to those who wish to use them for manufacturing or consumption. The exchanges are crucial for both producers and consumers of commodities. Commodity futures exchanges plays a very vital role in setting global standard prices for necessary commodities such as crude oil, gold, copper, orange juice, and coffee.
The speculators of market or we can say that the market explorer and gamblers provide liquidity to the markets, which is a main reason behind the market progress and survival. And they make up the majority of the trading on commodity exchanges. However, they also take intraday tips if they wish to invest in intraday trading. Because the market is very volatile and risky and the accurate predictions on market is not very easy.