A commodity is Description, classes, characteristics

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Today, trading on the stock exchanges is carried out on a limited number of goods, since not every one of them is designed for this. According to the Law of the Russian Federation, an exchange commodity is one that has not gone out of circulation, has certain qualities and is admitted to the market by the exchange. Let's talk about this complex concept today.

Exchange requirements

It so happened that each exchange independently determines which goods will be traded on its platform. Every year the product range changes, only some requirements remain unchanged:

1. Compulsory standardization. Exchanges trade even when the declared goods are not available. Therefore, it is necessary to ensure maximum standardization, that is, all products must have the declared quality level, enter the stock exchange in the maximum quantity, have identical storage and transportation conditions and contract deadlines with other goods.
2. Interchangeability. An exchange commodity is one that can be replaced by another similar in composition, quality and appearance, as well aslabeling and batch quantity. Simply put, the goods can be depersonalized if necessary.
3. Mass character. Since there are many sellers and buyers on the exchanges at the same time, this makes it possible to sell large quantities of goods and more accurately generate data on supply and demand, which will subsequently affect the establishment of the market price.
4. Free pricing. Commodity prices should be freely set in response to demand, supply and other economic factors.

Perhaps these are the main characteristics of commodities formed by trading platforms.

What is this product?

A commodity is a product that is an object of exchange trading and meets its requirements. In world practice, there are three main classes of exchange positions: foreign currency; securities; material goods; stock price indices and interest rates on government bonds.

Goods that have a low degree of capitalization of production or use are more likely to remain objects of exchange trading. On the other hand, it is possible to trade highly monopolized goods on exchanges if there is an open trading segment and non-monopoly participants in transactions.

At the end of the 19th century, there were about 200 items of goods on the exchanges, but in the next century their number decreased significantly. In the past, major commodities were thought to be ferrous metals, coal, and other commodities that are not traded today. Already inIn the middle of the 20th century, the number of exchange products decreased to fifty, and it remained practically unchanged. At the same time, the number of futures markets began to expand. These are platforms that sell goods of a certain quality, so several futures can be created for one product.

Nomenclature

Traditionally, exchange commodities are products of two main groups:

1. Agricultural and forest products, as well as products that are obtained after their processing. This category includes cereals, oilseeds, animal products, food flavors, textiles, forest products, rubber.
2. Industrial raw materials and semi-finished products. This type of exchange commodity includes non-ferrous and precious metals, energy carriers.

The number of commodities from the first group has been steadily declining since the 1980s. However, there has been an upward trend in recent years. It is worth noting that scientific and technological progress has a great influence on the commodity market. As a result of the development of science, many substitutes for some products on the exchange have appeared. Competition between them helps to stabilize prices and reduce exchange turnover. Also, the NTP contributed to the increase in goods of the second category on the exchange.

New varieties

The concept of a commodity in the modern world has expanded significantly. Today, such a group of trade objects as financial instruments is often encountered. People trade in price indices, bank interest, mortgages, currencies and contracts. Suchoperations were first practiced in the 70s of the last century.

The development of futures markets was greatly influenced by the transformation of the world economy in the 70s, when the exchange rates between the dollar and the euro began to fluctuate. The first futures contracts were concluded for pledge certificates of the National Pledge Association and foreign currencies. To develop such contracts, it took about five years of hard work. Futures trading gradually expanded and began to cover more and more types of financial resources. In the same 70s of the last century, they first began to trade options. In 1973, the world's first Chicago Board Options Exchange was opened in the United States of America.

Commodity contracts played a leading role on the stock exchanges until the end of the 70s. Later, the share of financial futures and option contracts began to increase. Fuel commodities, precious and non-ferrous metals begin to occupy a significant place among the exchange commodities on the commodity exchange. The level of trading in futures for agricultural products has increased.

First item and deals

As soon as exchanges began to emerge, peppers were at the top of the list of commodities. It, like the main part of other spices, was quite homogeneous, therefore, based on one small sample, it was possible to form an opinion about the entire batch as a whole.

Today, about 70 types of commodities are bought and sold. Exchange transactions are classified according to different criteria. On theexchanges, people can buy both real-life goods and contracts that provide the right to own something. According to this sign, two main types of transaction are determined:

• Deals with real goods.
• Deals without goods.

It was transactions with real goods that laid the foundation for the creation of exchanges. To date, the main goods of world exchange trading are: securities, currency, metals, oil, gas and agricultural products.

Securities

Securities are a special commodity that can only be purchased on the securities market. This is a document of a certain form, which certifies property rights. In a broader sense, any document that can be bought or sold at an appropriate price can be called a security. For example, in the Middle Ages, indulgences were sold, and as for our time, “MMM tickets” will be an excellent example. Today it is almost impossible to give an exact definition of the concept of "security", therefore, in legislative acts, its significant functions are simply fixed:

• Distributes monetary capital among economic segments, countries, territories, companies, groups of people, etc.
• Gives the owner additional rights, for example, he can participate in the management of the company, own important information, etc.
• Securities guarantee a return on capital or return of capital itself.

Securities provide an opportunity to get moneyin a variety of ways: it can be sold, used as collateral, donated, inherited, etc. As an exchange commodity, papers can be divided into two large classes:

1. Main securities or primary securities. This category usually includes stocks, bonds, bills, mortgages and depositary receipts.
2. Derivative securities – futures contracts, freely traded options.

Major securities can be freely bought and sold on and off exchanges. But in some cases, financial transactions with securities may be limited, and they can be sold only to those who issued, and then after the expiration of the agreed period. Such securities cannot be an exchange commodity. Only those securities that are issued in sufficient volume to meet the needs of supply and demand can deserve this status.

Currency

Since each country has its own currency, and no one has come up with a single means of payment, then when buying foreign goods, one has to deal with the procedure of converting one currency into another. Usually, all foreign money and securities denominated in their equivalent, means of payment and precious metals are called currency.

Specialists have long considered the currency as an exchange commodity that can be sold and bought. To make a purchase and sale operation, you need to know what the current exchange rate is and how it can change. The exchange rate is the price at which foreign money can be bought or sold. The exchange rate can be set by the state, andmay be determined by supply and demand in the open exchange market.

When determining the exchange rate, it is worth considering the direct and reverse exchange quotation of the goods, which is given with an accuracy of four digits after the decimal point. Most often there is a direct quotation, which means that a certain amount of currency (usually 100 units) is the basis for designating an unstable amount of the national currency. For example, a franc exchange rate of 72.6510 for guilders would mean that for 100 guilders you can get 72.6510 francs.

Rarely, but still it happens, exchanges use a reverse quote based on a fixed amount of the national currency. Until 1971, it was used in England, since there was no decimal system in the monetary sphere, the reverse quotation was easier to use than the direct one.

Trading currency on stock exchanges is possible only if there is no state restriction on its free sale and purchase.

Commodity market

If everything is clear with securities and currency, then the commodity market is a more complex structure. This is a complex socio-economic category, which is manifested in various aspects of interactions. We can say that this is the sphere of commodity exchange, in which the relations of purchase and sale of goods are realized, and certain economic activities take place that sells products.

Main elements of the commodity market:

• Supply is the total amount of production.
• Demand - the need for manufactured productssolvent population.
• Price is the monetary value of the goods.

Also, the commodity market can be divided into the market of finished products, services, raw materials and semi-finished products. These segments, in turn, are divided into markets for separately manufactured products, among which there are exchange markets.

Non-ferrous and precious metals

All metals are divided into industrial and precious. Precious metals include gold, with which transactions are most often made in order to accumulate funds. As a result of high inflation in the securities and currency markets, people are turning to the precious metals market en masse to protect their assets. Since the extraction of precious metals is limited, their value remains stable, despite possible fluctuations in the economy.

Industrial exchange metals are copper, aluminium, zinc, lead, tin and nickel. They are usually bought to be recycled, so their value is related to changes in supply and demand.

However, there are metals that have a dual nature. For example, silver. In certain eras, it was perceived as a precious metal, later - as an industrial one. It all depends on economic conditions. In any case, industrial and precious metals are classic examples of commodities.

Oil Market

Until the 60s of the last century, the world market for oil and oil products was something illusory and unstable, since a high level of monopolization would lead to serious changes inmarket relations. But even at that time, the practice of concluding short-term (one-time) deals with sellers or buyers who had nothing to do with the monopoly market began to appear.

In the 70s, private refineries began to build their own factories. Their products found demand and were sold even on a long-term basis, although most often such companies entered into short-term (one-time) deals. Since there were more short-term deals, companies bought raw materials in a similar way.

In the 1980s, the oil market became unstable and the importance of long-term contracts decreased significantly. The market for one-time transactions quickly began to form, which fully covered the needs of consumers. Of course, this also increased the risks of financial losses due to price fluctuations. Therefore, for a long time, experts have been looking for funds that will help to avoid possible losses. Exchanges have become one of these tools.

Petrol and gas

In 1981, the New York Mercantile Exchange established an agreement to sell leaded gasoline, which proved to be very successful. Three years later, it was replaced by a contract for the purchase and supply of unleaded gasoline, which immediately attracted the attention of oil market traders. In the mid-90s, not entirely favorable sales conditions arose for this exchange commodity in connection with the introduction of new laws that protected the environment. But already at the end of 1996, all problems were solved, and trading in this market continued with the same success.

In the last years of the twentieth century, futures were introducedcontracts for natural gas. However, the first attempts were not as successful as expected. The reason for this was the unformed centers of mass sales and product delivery systems. Although now natural gas contracts look very attractive.

Indices

And the last thing worth mentioning when describing a commodity is stock indices. They were invented so that bidders could get the right information about what is happening in the market. Initially, indices performed only an informational function, showing market trends and the speed of their development.

But gradually accumulating data on the state of stock indices, economists and financiers were able to make forecasts. After all, in the past you can always find a similar situation and see what the index movement was like. The likelihood that this would happen again at the present time was high.

Over time, the use of the index has become multifunctional. It even began to be used as an object of trade, offering it as a basic commodity for the development of a futures contract. Indices are sectoral, global, regional and free, they are used in any of the markets. Although they originated in the stock market, where they still have the greatest distribution.

Indices are usually named after the person who came up with a certain methodology or news agencies that calculate them. The most famous and oldest world index is the Dow Jones index. Charles Dow, owner of DowJones , in 1884, tried to understand how the price of the shares of the eleven largest companies had changed. Although he managed to calculate not so much the index as the average value, but even today this method is used in the economy.