1. Agricultural: Rice, cocoa, cotton, et cetera
2. Energy: Natural gas, crude oil, gasoline, et cetera
3. Livestock and meat: Live cattle, pork bellies, feeder cattle, et cetera
4. Metals: Platinum, gold, silver, et cetera
The commodities market deals with agricultural products or raw materials as opposed to manufactured goods. These goods are classified as either soft or hard commodities. Soft commodities include things that are grown or reared pork bellies, such as fruits, wheat, coffee, sugar, corn, et cetera. On the other hand, hard commodities include things that are mined such as gold, silver, oil, platinum, et cetera.
Trading in the commodities market involves either physical trading of the goods themselves (cash commodities or actuals) or a derivative security of the goods (derivatives trading). These derivative securities include options on futures, forwards, futures, and spot prices.
Derivatives are grouped as either exchange-traded (standardized contracts) or over-the-counter (OTC) – non-standardized contracts. Standardized contracts mean that the commodities are of a certain industry standard. Over-the-counter contracts are privately negotiated. Examples of exchange-traded derivatives include forwards, futures, and so on.
A forward contract or a forward is non-standardized. The agreement between the parties is that a commodity will be bought or sold for today’s price (forward price) with payment or delivery at a specific future date.