Commodity futures trading involves buying and selling contracts for the future delivery of physical raw materials, explains Mark Hansen, director of trading at New York-based specialty commodities firm CPM Group. Examples of frequently traded commodities include gold, copper, soybeans and even live cattle or pigs.
Because the prices of commodities tend to be uncorrelated with the prices of other assets such as stocks and bonds, the overall volatility of a portfolio tends to be lower. And because most investors define risk as volatility, when it is lower there is less risk.
Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures.