Today, trading on exchanges is carried out on a limited number of goods, since not every one of them is designed for this. According to the Law of the Russian Federation, exchange commodity is one that has not gone out of circulation, has certain qualities and is admitted by the exchange to the market. Today we’ll talk about this complex concept.
Exchange requirements
It so happened that each exchange independently determines which goods will enter the turnover on its platform. Every year the commodity nomenclature changes, only some requirements remain unchanged:
- Mandatory standardization. On exchanges they trade even when the declared goods are not available. Therefore, it is necessary to ensure maximum standardization, that is, all products must have the declared level of quality, enter the exchange in the maximum quantity, have storage, transportation conditions and the terms of the contract identical with other goods.
- Interchangeability. Exchange commodity is one that can be replaced by another one similar in composition, quality and appearance, as well as marking and lot quantity. Simply put, the product can be anonymized if necessary.
- Massiveness. Since there are many sellers and buyers at the same time on exchanges, this makes it possible to sell large quantities of goods and more accurately generate data on supply and demand, which will subsequently affect the establishment of market prices.
- Free pricing. Commodity prices should be freely set depending on demand, supply and changes in other economic factors.
Perhaps these are the main characteristics of exchange goods formed by trading platforms.
What is this product?
Exchange commodity is a product that is an object of exchange trade and meets its requirements. In world practice, there are three main classes of exchange positions: foreign currency; securities; material goods; stock price indices and interest rates on government bonds.
Goods that have a low degree of capitalization of production or use are more likely to remain objects of exchange trading. On the other hand, trading on exchanges with highly monopolized goods is possible if there is an open trade segment and non-monopoly participants in transactions.
At the end of the 19th century, there were about 200 items of goods on exchanges, but already in the next century their number decreased significantly. In the past, large commodities were thought to be ferrous metals, coal, and other products that are not traded today. Already in the middle of the twentieth century, the number of exchange products decreased to fifty, and it practically did not change. At the same time, the number of futures markets began to expand. These are platforms on which goods of a certain quality are sold, therefore several futures can be created for one product.
Nomenclature
Traditionally, commodities are the products of two main groups:
- Agricultural and forest products, as well as products that are obtained after their processing. This category includes cereals, oilseeds, animal products, food products, textiles, forest products, rubber.
- Industrial raw materials and semi-finished products. This type of exchange goods includes non-ferrous and precious metals, energy.
The number of commodities from the first group has been steadily declining since the 80s of the last century. Although recently, growth trends have again been noticed. It is worth noting that scientific and technological progress has a great influence on the stock market . As a result of the development of science, many substitutes for some products on the exchange have appeared. Competition between them helps to stabilize prices and reduce exchange turnover. NTP also contributed to the increase of goods of the second category on the exchange.
New varieties
The concept of stock exchange in the modern world has expanded significantly. Today, such a group of trading objects as financial instruments is often found. People trade in price indices, bank interest, mortgages, currencies and contracts. Such operations first began to be practiced in the 70s of the last century.
The development of the futures markets was greatly influenced by the transformation of the global economy of the 70s, when the exchange rates between the dollar and the euro began to fluctuate. The first futures contracts were concluded on the security certificates of the National Collateral Association and foreign currency. To develop such contracts, it took about five years of hard work. Futures trading gradually expanded and began to cover more and more types of financial assets. In the same 70s of the last century, they first started trading options. In 1973, the world's first Chicago options exchange was opened in the United States of America.
Commodity contracts played a leading role on exchanges until the end of the 70s. Later, the share of financial futures and option contracts began to increase. A significant place among commodities on the commodity exchange is beginning to take fuel products, precious and non-ferrous metals. The level of agricultural futures trading has grown.
First product and deals
As soon as exchanges began to emerge, ordinary pepper was in first place in the list of commodities. He, like the main part of other spices, was quite homogeneous, therefore, on the basis of one small sample, it was possible to form an opinion about the whole party as a whole.
Today, about 70 types of commodities are sold and bought. Exchange transactions are classified according to various criteria. On exchanges, people can buy both real-life goods and contracts that provide the right to own something. According to this attribute, two main types of transaction are determined:
- Transactions with real goods.
- Transactions without goods.
It was deals with real goods that laid the foundation for the creation of exchanges. To date, the main commodities of world exchange trading are: securities, currency, metals, oil, gas and agricultural products.
Securities
Securities - this is a special product that can only be purchased on the securities market. This is a document of a certain form that certifies property rights. In a broader sense, a security can be called any document that can be bought or sold at an appropriate price. For example, in the Middle Ages indulgences were sold, and as for our time, “MMM tickets” will be an excellent example. Today it is practically impossible to give a precise definition of the term “security”, therefore, its legislative functions simply record its significant functions:
- Distributes money capital between economic segments, countries, territories, companies, groups of people, etc.
- Gives the owner additional rights, for example, he can participate in the management of the company, own important information, etc.
- Securities guarantee a return on capital or the return of capital itself.
Securities make it possible to receive money in a different way: it can be sold, used as collateral, presented as a gift, inherited, etc. As a commodity, securities can be divided into two large classes:
- Major securities or primary securities. This category usually includes stocks, bonds, bills, mortgages and depositary receipts.
- Derivative securities - futures contracts, freely traded options.
Major securities may be freely bought and sold on exchanges and beyond. But in some cases, financial transactions with securities may be limited, and they can be sold only to those who issued, and then after the expiration of the agreed period. Such securities cannot be exchange commodities. This status can only be earned by those securities that are issued in sufficient quantities to meet the needs of supply and demand.
Currency
Since each country has its own currency, and no one came up with a single means of payment, when shopping for foreign goods, one has to deal with the procedure for converting one currency into another. Usually all foreign money and securities, means of payment and precious metals expressed in their equivalent are called the currency.
Specialists have long regarded the currency as a commodity that can be sold and bought. To make a purchase and sale operation, you need to know what the exchange rate is and how it can change. The exchange rate is the price at which you can buy or sell foreign money. The exchange rate can be set by the state, and can be determined by demand and supply on the open exchange market.
When determining the exchange rate, it is worth considering the direct and reverse exchange quotation of the goods, which is given with an accuracy of four digits after the decimal point. Most often, there is a direct quote, which means that a certain amount of currency (usually 100 units) is the basis for designating an unstable amount of the national currency. For example, a franc rate of 72.6510 for guilders will mean that for 100 guilders you can get 72.6510 francs.
Rarely, but nevertheless it also happens, reverse quotation is applied on exchanges, based on a solid amount of the national currency. Until 1971, it was used in England, since there was no decimal system in the monetary sphere, a reverse quote was easier to use than a direct one.
Currency trading on exchanges is possible only if there is no state restriction on its free sale and purchase.
Commodity Market
If everything is clear with securities and currency, the commodity market is a more complex structure. This is a complex socio-economic category, which is manifested in various aspects of interactions. We can say that this is the sphere of commodity exchange, in which the relations of sale of goods are realized, and there is a certain economic activity that sells products.
The main elements of the product market:
- Offer - the entire number of products.
- Demand - the need for manufactured products of the solvent population.
- Price - the monetary expression of the value of the goods.
Also, the commodity market can be divided into the market of finished products, services, raw materials and semi-finished products. These segments, in turn, are divided into markets for separately manufactured products, among which are exchange markets.
Non-ferrous and precious metals
All metals are divided into industrial and precious. Precious metals include gold, with which they most often make transactions in order to accumulate funds. As a result of high inflation in the securities and currency markets, people are massively turning to the precious metals market to protect their assets. Since the extraction of precious metals is limited, their value remains stable, despite possible economic fluctuations.
Industrial exchange metals are copper, aluminum, zinc, lead, tin and nickel. Usually they are bought to be subsequently processed, so their value is associated with changes in supply and demand.
However, there are metals that have a dual nature. For example, silver. In certain eras, it was perceived as a precious metal, and later - as industrial. It all depends on economic conditions. In any case, industrial and precious metals are classic examples of commodities.
Oil market
Until the 60s of the last century, the world market of oil and oil products was something ghostly and unstable, since a high level of monopolization would have led to serious changes in market relations. But even at that time, the practice of concluding short-term (one-time) transactions with sellers or buyers who had nothing to do with the monopoly market was already beginning to appear.
In the 70s, private oil refineries began to build their plants. Their products found demand and were sold even on a long-term basis, although most often such companies entered into short-term (one-time) transactions. Since there were more short-term deals, companies bought raw materials in this way.
In the 80s, the oil market became unstable and the value of long-term contracts decreased significantly. The market for one-time deals quickly began to form, which completely covered the needs of consumers. Of course, this also increased the risks of financial losses due to price fluctuations. Therefore, for a long time, specialists were looking for funds that will help avoid possible losses. One of these tools have become exchanges.
Gas and gas
In 1981, the New York Mercantile Exchange established an agreement on the sale of leaded gasoline, which was very successful. Three years later, he was replaced by a contract for the purchase and supply of unleaded gasoline, which immediately attracted the attention of oil market traders. In the mid-90s, conditions for the sale of this commodity were not entirely favorable due to the introduction of new laws that protected the environment. But already at the end of 1996, all problems were resolved, and trade in this market continued with the same success.
In the last years of the 20th century, futures contracts for natural gas were introduced. However, the first attempts were not as successful as expected. The reason for this was the unformed centers of mass marketing and product delivery systems. Although now contracts for natural gas look very attractive.
Indices
And the last thing that is worth mentioning when characterizing a commodity is exchange indices. They were invented so that bidders had the opportunity to receive the necessary information about what is happening on the market. Initially, indices performed only an information function, showing market trends and the speed of their development.
But gradually accumulating data on the state of stock indexes, economists and financiers were able to make forecasts. Indeed, in the past you can always find a similar situation and see what the index movement was like. The likelihood of this happening again was high.
Over time, the use of the index has become multifunctional. They even began to use it as an object of trade, offering it as a basic product for the development of a futures contract. Indices are sectoral, global, regional and free, they are used in any of the markets. Although they arose on the stock, where they still have the greatest distribution.
Indexes are usually called in honor of the one who came up with a particular methodology or the news agencies that count them. The most famous and oldest world index is the Dow Jones index. Charles Dow, the owner of Dow Jones, tried in 1884 to understand how the stock price of the eleven largest companies changed. Although he managed to calculate not so much the index as the average cost, but even today, this method is used in the economy.