Post by Trade facilitator on Apr 11, 2021 11:25:44 GMT 1
How You Can Participate In Commodities Markets And Exchanges In Nigeria
We have been bringing to our readers matters regarding Commodities Markets and Exchanges in Nigeria for some time now. The emergence of Commodities Exchange will definitely change the way trading of agricultural products is done in Nigeria forever. If you fail to key into the system, you will regret it in due course.
Let us refresh our memory on what commodities markets are and the players before discussing how to practically become a player in the lucrative market.
What are Commodity Exchanges?
Commodity Exchange is an organized, regulated market that facilitates the purchase and sale of Standardized Contracts whose values are tied to the price of commodities.
Examples of Commodities are:
Maize
Crude oil
Gold
Cashew nuts
Sesame seeds
Cotton
and Currencies.
Please, carefully look at what are being sold and purchased at the commodities exchanges; you are not buying and selling physical goods, rather you are buying and selling standardized contracts.
The buyers of these contracts agree to accept delivery of a commodity, and the sellers agree to deliver the commodity. Remember, we are talking of contracts, and not physical goods.
What are standardized contracts?
Commodity contracts are normally used by buyers and sellers of commodities to lock in future delivery price. Exchange must stipulate the following standardized features of each contract:
Standard Quantity: This is the amount of commodity represented in the contract. Quantity of a commodity can be represented in metric unit, imperial unit, or in a traditional unit such as a barrel or a bag. For example, cocoa can be represented or expressed in metric tons, while crude oil can be expressed in barrels.
Standard Quality: Quality dictates the features of the commodity being traded in the contract. The commodity may have some specific qualities or may have to come from specific regions. For example, sesame seeds may have to come from Kano state in Nigeria and brown in color.
Minimum Price: The contracts can stipulate the minimum price increments at which a particular commodity can trade. The contract can stipulate that a barrel of crude oil to increase in $0.01 increments. It is important that exchanges do not determine the price of commodities. Traders and member firms determine the prices through the mechanism of price discovery. This is process where buyers and sellers determine the price at which supply meets demand.
Standardized Delivery: This refers to the exchanges stipulating the delivery date for each contract, the method and place of delivery. The settlement can even be done in cash rather than by physical goods.
We have just dealt with situations where the commodities are physical in nature, for example, you can deal in maize, gold, crude oil etc. at your commodities exchange. Some exchanges also trade options contracts.
Who are responsible for enforcing and establishing rules and regulations?
The members and management of commodities exchanges are responsible for establishing and enforcing rules and regulations that govern the trading of all these standardized commodities contracts.
You therefore cannot just act the way you want as there are standardized rules and regulations that are enforceable by regulatory authorities in each country or regions where the exchanges operate.
Who are the main players in the Commodities Exchanges?
Quite a diverse group of people participate in the business going on at the commodities exchanges and they play crucial roles that keep the exchanges functioning properly. The proper and impartial functioning of the exchanges give the public the confidence to trade on the exchange without fear.
The exchange is in charge of making sure that the rules are fair to all parties that participate in the market.
Producers:
These are the people and companies that supply the physical products being traded on the floor of the exchanges.
Without the producers nothing will be traded on the commodities exchange. They can be farmers, cattle ranchers, mining companies, and oil and gas companies.
These producers often sell commodities future contracts before producing the commodity. For example, a sesame seed farmer that is not comfortable with the way the price of the product is fluctuating can decide to sell futures contract three months before harvest.
So with this the farmer or producer can conveniently sell his products even before the harvest has taken place.
Industrial End-Users:
These are companies and individuals who use commodities in their production processes. They are the manufacturers and producers who provide the demand for the commodities being traded on the exchanges.
Examples are:
Factories
Food manufacturers
Construction companies
Textile companies
The commodity exchanges allow these end-users the opportunity to buy their products in advance.
If they foresee an increase in price in the future or incoming scarcity of their critical products, they can purchase the materials before they are even harvested.
Traders:
This group of professionals in the commodities exchange business is the independent traders and trading companies who act as intermediaries between producers and industrial end-users.
Let us assume that a producer has excess stock of his products, and wants to sell but no industrial end-user is ready at that time to buy from him; the traders will now move in and buy the product off the producer.
Similarly, if an industrial end-user urgently needs some products for production, and the producers don’t have; the professional traders will provide the product to the end-user.
For their effort for maintaining liquidity in the market, the professional traders earn a spread (profit).
Speculators:
The last group of players in the commodities exchange is known as the speculators.
These are traders that speculate or predict, or bet on the direction of commodities prices. They are sophisticated investors or traders who purchase commodities for short periods of time and employ strategies in order to profit from its change in price.
They are important in the commodities market also, as they equally provide liquidity and take up some risks in case the move of price of commodities goes against them.
Their actions are often crucial in the commodities market as they are often another source of liquidity for both producers and industrial end-users.
Be prepared as we are going to discuss how you can start trading the commodities market in our next article.
Did you know that you can start trading the commodities market with N7,000 only? I do not believe that there is any role you cannot assume in the market.
You will learn all these and more in our next article.
Stay with us.
We have been bringing to our readers matters regarding Commodities Markets and Exchanges in Nigeria for some time now. The emergence of Commodities Exchange will definitely change the way trading of agricultural products is done in Nigeria forever. If you fail to key into the system, you will regret it in due course.
Let us refresh our memory on what commodities markets are and the players before discussing how to practically become a player in the lucrative market.
What are Commodity Exchanges?
Commodity Exchange is an organized, regulated market that facilitates the purchase and sale of Standardized Contracts whose values are tied to the price of commodities.
Examples of Commodities are:
Maize
Crude oil
Gold
Cashew nuts
Sesame seeds
Cotton
and Currencies.
Please, carefully look at what are being sold and purchased at the commodities exchanges; you are not buying and selling physical goods, rather you are buying and selling standardized contracts.
The buyers of these contracts agree to accept delivery of a commodity, and the sellers agree to deliver the commodity. Remember, we are talking of contracts, and not physical goods.
What are standardized contracts?
Commodity contracts are normally used by buyers and sellers of commodities to lock in future delivery price. Exchange must stipulate the following standardized features of each contract:
Standard Quantity: This is the amount of commodity represented in the contract. Quantity of a commodity can be represented in metric unit, imperial unit, or in a traditional unit such as a barrel or a bag. For example, cocoa can be represented or expressed in metric tons, while crude oil can be expressed in barrels.
Standard Quality: Quality dictates the features of the commodity being traded in the contract. The commodity may have some specific qualities or may have to come from specific regions. For example, sesame seeds may have to come from Kano state in Nigeria and brown in color.
Minimum Price: The contracts can stipulate the minimum price increments at which a particular commodity can trade. The contract can stipulate that a barrel of crude oil to increase in $0.01 increments. It is important that exchanges do not determine the price of commodities. Traders and member firms determine the prices through the mechanism of price discovery. This is process where buyers and sellers determine the price at which supply meets demand.
Standardized Delivery: This refers to the exchanges stipulating the delivery date for each contract, the method and place of delivery. The settlement can even be done in cash rather than by physical goods.
We have just dealt with situations where the commodities are physical in nature, for example, you can deal in maize, gold, crude oil etc. at your commodities exchange. Some exchanges also trade options contracts.
Who are responsible for enforcing and establishing rules and regulations?
The members and management of commodities exchanges are responsible for establishing and enforcing rules and regulations that govern the trading of all these standardized commodities contracts.
You therefore cannot just act the way you want as there are standardized rules and regulations that are enforceable by regulatory authorities in each country or regions where the exchanges operate.
Who are the main players in the Commodities Exchanges?
Quite a diverse group of people participate in the business going on at the commodities exchanges and they play crucial roles that keep the exchanges functioning properly. The proper and impartial functioning of the exchanges give the public the confidence to trade on the exchange without fear.
The exchange is in charge of making sure that the rules are fair to all parties that participate in the market.
Producers:
These are the people and companies that supply the physical products being traded on the floor of the exchanges.
Without the producers nothing will be traded on the commodities exchange. They can be farmers, cattle ranchers, mining companies, and oil and gas companies.
These producers often sell commodities future contracts before producing the commodity. For example, a sesame seed farmer that is not comfortable with the way the price of the product is fluctuating can decide to sell futures contract three months before harvest.
So with this the farmer or producer can conveniently sell his products even before the harvest has taken place.
Industrial End-Users:
These are companies and individuals who use commodities in their production processes. They are the manufacturers and producers who provide the demand for the commodities being traded on the exchanges.
Examples are:
Factories
Food manufacturers
Construction companies
Textile companies
The commodity exchanges allow these end-users the opportunity to buy their products in advance.
If they foresee an increase in price in the future or incoming scarcity of their critical products, they can purchase the materials before they are even harvested.
Traders:
This group of professionals in the commodities exchange business is the independent traders and trading companies who act as intermediaries between producers and industrial end-users.
Let us assume that a producer has excess stock of his products, and wants to sell but no industrial end-user is ready at that time to buy from him; the traders will now move in and buy the product off the producer.
Similarly, if an industrial end-user urgently needs some products for production, and the producers don’t have; the professional traders will provide the product to the end-user.
For their effort for maintaining liquidity in the market, the professional traders earn a spread (profit).
Speculators:
The last group of players in the commodities exchange is known as the speculators.
These are traders that speculate or predict, or bet on the direction of commodities prices. They are sophisticated investors or traders who purchase commodities for short periods of time and employ strategies in order to profit from its change in price.
They are important in the commodities market also, as they equally provide liquidity and take up some risks in case the move of price of commodities goes against them.
Their actions are often crucial in the commodities market as they are often another source of liquidity for both producers and industrial end-users.
Be prepared as we are going to discuss how you can start trading the commodities market in our next article.
Did you know that you can start trading the commodities market with N7,000 only? I do not believe that there is any role you cannot assume in the market.
You will learn all these and more in our next article.
Stay with us.
