Who would not want a handy guide containing all the jargons from the commodity trading world! Well, you’re in for luck. Here is a glossary of all terms, categorised in alphabetical order.
There are two parts to the commodity trading process: order processing and mark to market (MTM) settlement.
Arbitrage : The simultaneous purchase and sale of similar commodities in different markets. Sometimes the same commodity trades at different prices in different markets. A profit can be made by buying at a low price in one market and selling at a high price in another.
Arbitration : The procedure of settling disputes between brokers, or between brokers and their customers. The process is overseen by a financial regulatory authority.
Bar Chart : A bar chart used in technical analysis and is represented by a vertical line. The top of the vertical line indicates the highest price a commodity is traded at during the day. The bottom represents the lowest price. The closing price is displayed on the right side of the bar. And the opening price is shown on the left.
Basis : The difference between the current cash price and the futures price of the same commodity. Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis.
Bear : A bear is an investor who believes that the price of a particular commodity is headed downward. The investor wants to sell the commodity at current prices to limit losses.
Bear Market : A market condition in which the prices of commodities are falling. Investors anticipate losses in a bear market and continue to sell. This further fuels pessimism in the market.
Bid : A bid is an offer made by an investor, trader, or dealer to buy a commodity. It specifies the price and quantity of a commodity a buyer is willing to buy.
Broker : A company or individual that executes futures and options orders on behalf of investors.
Brokerage Fee : A fee charged by a broker for executing a transaction between a buyer and seller. It is charged for services such as purchases, sales, and advice on the transaction, negotiations or delivery. It is also referred to as commission fee.
Bull : An investor who thinks market prices will rise. Investors who take this approach buy commodities in order to sell them at higher prices later.
Bull Market : It is a market condition in which prices of commodities are rising.
Carrying Charge : Storing physical commodities such as grains and metals involves certain costs. These include the cost of storage space, insurance, interest etc. Together they are known as 'carrying charge'. It is also referred to as the cost of carry or carry.
Cash Commodity : An actual physical commodity someone is buying or selling. For example soybeans, palm oil, gold, silver, etc. It is also referred to as actuals.
Cash Market : A place where people buy and sell the actual physical commodities. It is also called spot market.
Charting : The use of charts to analyze market behaviour and anticipate future price movements. In this method, investors can plot factors such as settlement prices, average price movements, volume, and open interest on charts. Two basic price charts are bar charts and point-and-figure charts.
Clearing Corporation :
Order : An independent corporation that settles all trades made at an exchange. It acts as a guarantor for all trades cleared by it. It ensures each day that all gains have been credited and all losses have been collected. It also sets and adjusts clearing member firm margins for changing market conditions.
Clearing House : It is an agency or separate corporation of a futures exchange. It is responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data. Clearing houses act as third parties to all futures and options contracts. They act as a buyer to every clearing member seller and a seller to every clearing member buyer.
Clearing Member : A member of an exchange clearing house. They are also known as brokers. Clearing members are responsible for the financial commitments of customers that clear through their firm.
Closing Price : The closing price is the average price at which a contract trades. It is calculated at both the open and close of each trading day. It is important because it determines whether a trader is required to post additional margins. It is also known as settlement price.
Closing Range : In the futures market, it refers to the trading range during the official closing period specified by the exchange. It specifies the minimum and maximum prices that a contract traded at during close.
Commission Fee : A fee charged by a broker for executing a transaction between a buyer and seller. It is charged for services such as purchases, sales, and advice on the transaction, negotiations or delivery. It is also referred to as brokerage fee.
Commodity : An article of commerce or a product that can be used for commerce. In a narrow sense, products traded on an authorized commodity exchange. The types of commodities include agricultural products, base metals, bullion and energy products.
Convergence : It is when cash and futures prices of a commodity tend to come together as the futures contract nears expiration. It implies that the basis is approaching zero.
Cost of Carry (or Carry) : Storing physical commodities such as grains and metals involves certain costs. These include the cost of storage space, insurance, interest etc. Together they are known as the cost of carry.