What is the commodity index?
The commodity index is a weighted diameter of the price of different commodities in a certain category. It is designed to follow the overall movements of this type of commodity. There are also indices that cover all commodities than to be limited to one particular type. Some investors decide to invest in financial instruments associated with the index.
In principle, the commodity is any physical good that can be bought or sold. The most common forms of commodities include metals and agricultural goods such as livestock or grains. The commodity index can also cover some forms of energy such as electricity or gas, but cannot include financial products such as stocks or currencies. There may be more than one form of each individual commodity within this index. For example, the energy index may include multiple types of oil, such as oil, heating oil and gasoline. Some indices that cover all commodities also exist.
It is important to realize that in some cases the prices of commodities do not concern how much you would have to pay for commodity today. Instead, prices are often trading with futures, in which the buyer pays either for the right or the possibility to buy a commodity for a specific price for a specified day in the future. This is very common in agricultural commodities such as livestock or grain where the goods will not be ready for use in the future. Because people buy and sell rights to buy these goods when they are available, they will gamble effectively what the demand and supply will be at this time.
commodities index will usually be weighed. This means that it is not just the diameter of the different commodities it covers. Instead, the formula will be used to calculate the index to emphasize the "weight" to specific commodities. Usually the index brings a special weight of the commodities that are traded in the largest amounts. The idea of weighing is that the index should better reflect overall movements in a particularthe market.
While the commodity index serves as a useful guide to see if it is worth investing in commodities as a whole, it has other uses. Investors can buy or sell financial tools based on the performance of the index. In order to give a very simplified example, the company can sell a contract promising that 31 December one US dollar (USD) per point pays off for the energy index.
This means that if the index in question is 4310 on this date, the company would pay the contract to the contract $ 4,310. Investors can then buy and sell the contract throughout the year, and the aim is to buy a contract for less than any payout. In general, if the index increases during the year, people are people to pay for the contract will also increase, because the chances are better that the possible payout will be even higher. Someone sells a contract before it is payable, can either believe that the index has reached the peak and will decline, or has now decided to achieve a small profit and avoid further risk.