To define what a commodity exchange is, it acts as an organized marketplace for agriculture goods, most importantly grains. Much like how stock exchanges provide a market for stocks and bonds to be purchased, a commodity exchange, otherwise known as commodity markets, provide a market for the trading and selling of commodities, i.e. grains. Most circulated commodity purchases on these exchanges are corn, soybeans, oil, eggs, wheat, beef, metals (i.e. gold, tin). The largest commodity market in the world is the Chicago Board of Trade. Such exchanges are trade associations formed voluntarily. There are two markets typical within a commodity exchange; these are both cash, and futures markets.
Cash Markets: Most commodity exchanges only deal with cash trading. A cash trade can be defined as where buying and selling of real commodities is taking place. The contract to purchase such commodities can require immediate delivery, or delivery upon a future date. Once the commodity has been delivered, the contract will then be satisfied. Commodity buyers are often consisted of exporters, storage facility operators, and or processing/milling firms. The purchasers of such commodities may include farmers.
Futures Market: The larger commodity markets have futures, as well contract markets. In either of these exchanges, traders often purchase and offer contracts to be in receipt of a specified quantity of a particular commodity, at a later date. The price of this contract is then later determined by a public auction, often situated within the pit of stock exchanges trading floor. Trading future contracts often can be categorized into either of these two categories: speculative trading, and or hedging.
Speculative Trading: This takes place when purchasing and sales of futures contracts are traded in attempt of making a profit from later price fluctuations. These traders are called, speculators, who attempt to predict prices far in advance, i.e. months. Those speculators who purchase future contracts in hopes of rising prices, is called a long. On the other hand, those that offer futures contracts for a particular commodity, i.e. gold, when they particularly do not have the commodity is called a short.
Hedging: This takes place when a commodities owner, purchases or sells futures contracts to limit risks associated with price fluctuations. When the owner hedges, they then pass on the commodities risk to the speculator.
In the U.S, those federal laws which regulate commodity trading are orchestrated by the Commodity Future Trading Commission, which is actually an independent agency of the U.S government.