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What Are Commodity Futures?

Commodity futures are part of contract agreements that center around the buying and selling of a particular product at a future time. The agreement binds the buyer to paying a particular price, and the seller to delivering the product by a particular date.

Commodity futures refer to physical commodities, from food items to gold and precious metals to ingredients such as grains. The commodities must already exist when the agreement is made, but usually, the prices of the commodities tend to vary. For example, gold prices can fluctuate depending on world trade, or the price of grain can be affected by weather conditions that can affect the value of a crop. Commodity futures allow a buyer to “peg” a price, while the seller sets that price at a level that guarantees a profit regardless of what may happen between the time the contract is signed, and the goods are delivered.

Commodity futures work for the buyer because he anticipates that the value of the good may increase, and thus get him a return on investment from what he paid. It also works for the seller because he gets a guaranteed sale. However like all investment trading commodity futures bear some amount of risk albeit far less than other kinds of investment. In fact, commodity futures generally pay off unless there is a catastrophic event that has a significant impact on the market and leads to a drastic slide in the value of the commodity. Cautious investors will then combine commodity futures with other types of investments such as stocks and bonds.

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