How Does It Work?

Investors trade commodities through exchange-traded futures contracts or over-the-counter forward contracts. This approach involves agreeing on prices months in advance, with exchanges standardizing the commodity’s quantity and minimum quality. Physical delivery of the commodities occurs on the physical commodities market. For example, a breakfast cereal manufacturer might purchase a corn futures contract for delivery at a future date.

By purchasing corn via a futures contract, the buyer is protected if the market price of corn rises above the agreed-upon price. This allows both parties to plan and budget with greater certainty. However, most commodity traders do not take physical possession of the goods. Instead, they engage in financial transactions, either taking long or short positions in a particular commodity. This is typically facilitated through an online trading platform.