Commodity PricesThe financial term commodity is defined as a physical substance, such as food, grains, cereals, and metals, that is interchangeable with other products of the same type and that investors buy or sell , usually through future contracts. Or more generally, a product traded on a commodity exchange; this would also include foreign currencies, financial instruments and indices. When we talk about goods we can refer to two types of this aspect of finance. A cash or actual commodity is an actual physical commodity that is delivered upon completion of a "contract". This is the least used commodity. (Investor Glossary). The most commonly used type of commodity is the commodity futures contract. Futures markets are described as continuous auction markets and exchanges that provide the latest supply and demand information with respect to individual commodities, financial instruments and currencies. Futures exchanges are where buyers and sellers of an expanding list of commodities, financial instruments and currencies meet to trade. The primary purpose of futures markets is to provide an efficient and effective mechanism for managing price risk. The futures market allows buyers and sellers to stabilize the price of something. Individuals and businesses seek to obtain insurance against adverse price changes. This is done by buying or selling futures contracts, with a price level set now, for items to be delivered later. A common practice among futures traders is called hedging. The details of hedging can be quite complex, but the principle is simple. Hedgers are individuals and companies who make purchases and sales in the futures market for the sole purpose of establishing a known price level, weeks or months in advance, for something that they subsequently intend to buy or sell in the spot market (such as a cereal market). elevator or in the bond market). In this way they try to protect themselves from the risk of an unfavorable change in prices in the meantime, or hedgers can use futures to lock in an acceptable margin between the purchase cost and the selling price. A perfect example of how futures trading works in the agricultural form of commodity is provided. For example, a food manufacturer will have to purchase additional corn from its supplier within three months.