Introduction to Commodities Investing

Module 2.1. Important Definitions of Commodities Investing

Section A: Core Commodities Terms

Ask Price: The price a seller is willing to accept for a commodity or security.

Backwardation: A market condition in which near-month futures are more expensive than longer-dated contracts, often indicating supply shortages or high demand.

Bid Price: The price a buyer is willing to pay for a commodity or security.

Carrying Costs: Expenses related to storing a physical commodity, such as warehousing, insurance, and spoilage.

Cash Commodity: The actual physical commodity that is traded (e.g., gold bars, barrels of oil).

Contango: A market condition where futures prices are higher than the expected spot price, often due to storage and insurance costs.

Derivative: A financial instrument whose value is derived from an underlying asset like commodities, currencies, or indexes.

Futures Contract: A standardized agreement to buy or sell a specific quantity of a commodity at a predetermined price at a specified future date.

Hard Commodity: Natural resources that are mined or extracted, such as metals and oil.

Hedge: A strategy to reduce risk by taking an offsetting position in a related security.

In the Money / Out of the Money / At the Money: Terms used to describe the profitability of options based on the relationship between market price and strike price.

Initial Margin: The upfront collateral required to open a position in a futures contract.

Limit Up / Limit Down: The maximum price movement allowed in a commodity futures market in a single trading session.

Maintenance Margin: The minimum account balance that must be maintained to keep a futures position open.

Margin Call: A demand by a broker for an investor to deposit additional funds to maintain a position.

Open Interest: The number of outstanding contracts that have not been settled.

Physical-Based: Products or funds that are backed by physically held commodities.

Settlement Price: The official closing price of a futures contract, used to determine gains and losses.

Soft Commodity: Agricultural products like coffee, wheat, or cocoa that are grown rather than mined.

Spot Price: The current market price for immediate delivery of a commodity.

Volatility: The degree of variation in trading prices over time, reflecting market uncertainty or risk.

Section B: Extended Investment Terms

Alpha: A measure of an investment's performance relative to a benchmark, adjusted for risk.

Assets Under Management (AUM): The total market value of investments managed by a fund or financial institution.

Authorised Participant: A financial entity authorized to create or redeem shares in an ETF.

Beta: A measure of a security's volatility compared to the overall market.

Correlation: A statistic indicating how two assets move in relation to each other.

Currency Risk: The risk that currency fluctuations will affect investment returns.

ETF (Exchange-Traded Fund): A fund that trades like a stock and typically tracks a market index or commodity.

ETN (Exchange-Traded Note): A debt instrument linked to the performance of an underlying index.

Expense Ratio: The annual fee expressed as a percentage of fund assets, covering management and operational costs.

Index: A statistical measure of the performance of a group of assets, such as the S&P 500.

Liquidity Provider: A firm or individual that actively offers to buy and sell a security to ensure market liquidity.

Market Cap: The total market value of a company's outstanding shares.

Mutual Fund: A pooled investment vehicle that buys a diversified portfolio of assets.

P/E Ratio (Price-to-Earnings): A valuation metric comparing a company's current share price to its per-share earnings.

Safe Haven: An investment expected to retain value or appreciate in times of market uncertainty.

Sharpe Ratio: A risk-adjusted return measure that helps evaluate investment performance.

Tracking Error: The difference between the performance of a fund and its benchmark index.

Year-to-Date (YTD): A performance measure tracking returns from the beginning of the year to the current date.