Agricultural products play a crucial role in the economy.

With the development of technology and the Internet, investing can take on completely different forms. Anyone who wants to grow their money has access to numerous financial instruments. One of them is investments in commodity markets. And there is no need to go somewhere for this purpose, to prepare warehouses for storage of purchased property and to deal with its logistics. What is the purpose of such a market then? It's pretty simple here: setting fair prices for commodities and raw materials, insuring risks and making money.

The commodity market operates through exchanges. People have been buying, selling, and trading resources for millennia. Thus, operations involving commodities and goods are considerably more ancient than those involving currency or securities. At the dawn of the commodity exchanges, transactions were almost always accompanied by a real sale of assets. That is no longer the case, though. Of course, on some exchanges you can actually buy or sell real goods, but these transactions are extremely few. Trading primarily occurs using derivative financial instruments or derivatives. Let's talk about this in more detail.

Definition of the commodity market

• This term is understood as a market where individual goods, groups with similar consumer or production characteristics, as well as raw materials or ownership rights thereto of all participants are traded. Only in countries with low economic development do real assets act as objects of purchase and sale on exchanges. In developed nations, exchange in kind is virtually non-existent. Therefore, it is this kind of exchange trading in the commodity market that will be considered below. This financial instrument allows the investor to earn income on the price difference.
• Commodity market opens the possibility to trade hydrocarbons and energy commodities – gas, kerosene, gasoline, oil, coal etc.;
The list offered by the commodity exchange is quite extensive. The investor just needs to choose the asset that interests him/her the most. How the commodity exchange operates:

It functions according to specific internal rules and regulations. One takes into account the national legislation, the place of registration of the exchange. The value of goods is regulated by market conditions. An exchange can be universal (trades a large group of commodities) and specialized (offers only certain assets). Supply and demand determine fair prices. All products admitted to exchange trading are standardized according to certain criteria (type of underlying asset, its volume, delivery date, etc.).

Participants include as follows:

• organizers;
• intermediaries;
• traders.

Only a licensed participant can access exchange trading. To buy or sell assets, an individual needs to use the services of an intermediary – a broker. He/she enters into transactions on behalf of and with the investor's money, receiving a commission on the transactions as profit. AME Capitals Investment Company offers any adult citizen the opportunity to participate in trading on commodity exchanges. You can also get free expert financial advice.

Active trading on the commodity exchange is a job that requires certain skills and knowledge from the investor. If you don't have much experience, you can get it by making trades on the stock market or by following the recommendations of financial experts.

Types of transactions in the commodity market

Transactions based on derivatives are the most popular. Such contracts regulate the rights and obligations of the parties to perform certain actions related to the underlying asset. Buyers must buy at an agreed price and time, and sellers must sell. The organizer (the exchange) monitors the execution of trades. Sellers and buyers make a contribution, out of which the participants will be compensated if the contract is not fulfilled.

The most popular derivatives instruments are as follows:

• futures;
• options;
• forward contracts.

The underlying asset can be any commodity available on a particular exchange. The investor's return in this case is the difference between the purchase and sale prices. Keep in mind that the commodity market can be quite volatile, depending on the asset. Therefore, every transaction requires a preliminary analysis of the economic situation and market conditions.

Ways to invest in commodity markets

It all depends on the goals set regarding expected returns and the acceptable level of potential risks. One can invest by:

• investing in derivatives;
• purchasing securities of commodity exchange-traded funds (ETFs);
• acquiring shares of commodity producing, mining companies.

Each financial instrument requires choosing a specific strategy and investor's attention. Futures and options offer the highest potential returns.

Advantages of trading on the commodity market

The most common financial instrument on the commodity market is the futures contract. It has high liquidity and significant potential profitability. Transactions are carried out using the principle of leverage. You don't have to pay the whole amount, but only part thereof (the security deposit).

Trading on the commodity market is a convenient option for diversifying an investment portfolio. The fall in share prices is often accompanied by an increase in the value of goods and resources.

The commodity market is a way to reduce risks through hedging. For example, you produce oil, but there is no guarantee that in 6 months you will be able to sell it at the best price. With a futures contract, you can fix the price. If the market price at the time of futures contract execution is lower than the agreed price, you will make a profit, and if it is higher, you will make a loss. The difference will be made up by the actual sale of the underlying asset. In case of an unfavorable value in the future, it will not be possible to cover losses without hedging by means of a futures contract.

Besides, goods and commodities are not subject to inflation. This is a convenient and profitable option for investing during times of economic crises, wars, and epidemics. Trading on the commodity market requires a careful and competent approach. Understanding the purposes for which different transactions are performed and being aware of the potential risks is crucial.