Energy 

This group includes crude oil, natural gas, gasoline, heating oil etc. Economic developments around the world along with reduced oil outputs from renowned oil wells have led to rise in oil prices as demand for energy related products have gone up at the same time that oil supplies have dipped.

Investors interested in entering the energy sector trading need to be aware of the economic swings and any shifts in the production enforced by the OPEC countries. New technological advancements in the alternative energy sources (wind power, solar energy, biofuel etc) can also adversely impact the market prices of commodities in the energy sector.

Agriculture 

This category includes goods such as corn, soyabeans, rice, wheat, coffee, cocoa, cotton and even sugar. The most volatile of these products is grains as they are hugely dependent on weather related conditions. Investors looking to invest in the sector can benefit from the increasing population coupled with limited supply.

Livestock and Meat 

This classification comprises livestock and meat commodities such as feeder cattle, live cattle and even pork bellies among others.

Commodities trading through futures 

Futures contract is one of the major ways to invest in commodities. So, what is a futures contract?

A futures contract is a legal agreement that allows for selling or buying a particular commodity at a rate agreed to in advance at a particular time in future. Under this agreement the buyers are under the obligation to buy and receive the said commodity when the futures contract expires.

On the other hand, the seller of the futures is under the obligation to provide and deliver the said commodity at the expiry date of the contract.

So, who are the type of investors who participate in the futures markets and involve in the trading of the commodities? One is commercial or institutional investors and the other speculative investors.

But why do investors opt for futures trading? 

Futures contract is a part of manufacturers and service provider’s budgeting process with which they try to normalize their expenses and reduce cash-flow related issues. So, those manufacturers and service providers who rely on commodities for their production process may hold a position in the markets to reduce their financial risk due to price changes.

The aviation sector can be used as an example for explanation. The sector needs massive amounts of fuel and that is why they do hedging with futures contracts. How does it help them?

Futures allow them to buy fuel at fixed rates for a specified time. In this way, they can dodge the volatility in the market caused due to crude oil and gasoline.

Overall, futures can be a lower-risk option. It is like putting a deposit on something instead of purchasing it right away. This feature allows you the right but you are not obliged to follow through on the transaction on the expiry of the contract. The loss in this case is limited even if the futures doesn’t perform the way you anticipated as you had just purchased the option and not the commodity.