A commodity market is one that deals in raw materials rather than finished goods, such as cocoa, fruit, and sugar. Commodity pricing is primarily influenced by supply, demand, and scarcity. Futures contracts are the most traditional type of commodity investment. Physical trading and derivatives trading in commodity markets can include spot prices, forwards, futures, and options on futures. Commodity producers have used a simple form of derivative trading in the commodity market to manage price risk for ages.
The commodity market contains product varieties or grades, and each lot in a grade may vary from other lots in the same grade. That’s the reason why commodity deliveries have far greater implications for Buyers and Sellers. Commodity supply, like stock market supply, is not fixed. Certain commodities, such as precious metals, are thought to be a good inflation hedge and diversify a portfolio with a diverse set of commodities as an alternative asset class.