Commodity Trading Terms

Below are definitions of some of the most commonly used terms in the commodity world.

 

 

A

Accumulate: When traders buy a commodity heavily and “take it out of the market”.

Actuals: Commodities on hand, ready for shipment, storage, or manufacture.

Afloats: Commodities loaded on vessels and on way to destination. It may refer to loaded boats in the harbor and about to sail, but not to cargoes already at the destination.

Arbitrage: Simultaneous purchase and sale of the same quantity of the same commodity in two different markets, either in the same country or in different countries. Used to take advantage of what is believed to be a temporary disparity in prices.

At the market: An order to buy or sell at the best price obtainable at the time the order reached the trading pit or ring.

B

Basis: The price difference over or under a designated future at which a commodity of a certain description is sold or quoted.

Basis grade: Specified grade, or grades, named in the exchange’s futures contract. Other grades are tenderable, subject to price differentials from the basis, or “contract” grade.

Bid: A bid subject to immediate acceptance, made on the floor of an exchange to buy a definite quantity of a commodity future at a specified price; opposite of offer. See also Offer.

Break: A quick, extensive decline in prices.

Bulge: A rapid advance in prices.

Buy on close: To buy at the end of a trading session at a price within the closing range.

Buy on opening: To buy at the beginning of a trading session at a price within the opening range.

 

C

C&F (cost and freight): Cost and freight paid to the port of destination.

Carrying charge: Usually refers to warehouse charges, insurance, and other incidentals, often including interest charge and estimated loss (or gain) in weight. When used in connection with delivery against futures, this term includes weighing, sampling, taring, checking of weights, repairing, repiling, labour to scales, and so on.

Cash commodity: The actual physical product, as distinguished from the “future.” See also Spot commodity.

CCC: Commodity Credit Corporation.

Certified stocks or certified supplies: Supplies that have been approved as deliverable grades and often graded as to quality. Such gradings hold good for a specified period or for an indefinite time. Some exchanges list established deterioration schedules.

CFTC: Commodities Futures Trading Commission.

CIF: Cost, insurance, and freight paid or included to the port of destination.

Clearances: Total marine shipments of a specified commodity as of a given date from domestic and foreign ports.

Close: The period at the end of the trading session officially designated by the exchange during which all transactions are considered made “at the close.”

Closing price or range: The price or price range recorded during the period designated by the exchange as the official close.

Commission house: A concern that buys and sells actual commodities or futures contracts for the accounts of customers.

Contract grades: Those grades of a commodity that have been officially approved by an exchange as a deliverable in settlement of a futures contract.

Cover: The cancellation of a short position in any future by the purchase of an equal quantity of the same future. See also Liquidation.

Crop year: Period from the harvest of a crop to the corresponding period in the following year, as used statistically. U.S. wheat crop year begins June 1 and ends May 31; cotton, August 1 to July 31; varying dates for other commodities.

 

D

Day orders: Orders at a limited price are understood to be good for the day only unless expressly designated as an open order or good till cancelled order.

Deliverable grades: See Contract grades.

Delivery: The tender and receipt of the actual commodity, or warehouse receipts covering such commodity, in settlement of a futures contract.

Delivery month: A specified month within which delivery may be made under the terms of a futures contract.

Delivery notice: A notice of a clearing member’s intention to deliver a stated quantity of a commodity in settlement of a futures contract.

Delivery points: Those points designated by futures exchanges at which the physical commodity covered by a futures contract may be delivered in fulfilment of such contract.

Differentials: The premiums paid for the grades better than the basis grade, and the discounts allowed for the grades lower than the basis grades. These differentials are fixed by the contract terms on most exchanges; but in cotton, commercial differentials or differences apply.

 

E

Evening up: When for any reason traders are completing their transactions by selling in the case of longs or by purchasing in the case of shorts, they are said to be “evening up.”

EX-store: Selling term for commodities in a warehouse.

 

F

FAQ: Fair average quality.

Farm prices: The prices received by farmers for their products, as published by the U.S. Department of Agriculture, as of the 15th of each month.

First notice day: First day on which transferable notices can be issued for delivery in a specified delivery month.

FOB: Free on board. Usually, covers the cost of putting commodities on board whatever shipment conveyance is being used.

Forward shipment: This type of contract covers actual commodities to be shipped at some future specified date.

Futures: A term used to designate any or all contracts covering the sale of commodities for future delivery made on an exchange and subject to its rules.

 

G

Grades: Various qualities according to accepted trade usage.

Grading certificates: Certificates attesting to the quality of a commodity graded by official inspectors, testers, graders, and so on.

Growths: Description of a commodity according to an area of growth; refers to a country, district, or place of semi-manufacture.

GTC: Good till cancelled. Usually, refers to open orders to buy or sell at a fixed price.

 

H

Hedge: A sale of any commodity for further delivery on or subject to the rules of any futures market to the extent that such sales are offset in quantity by the ownership or purchase of the same cash commodity; or, conversely, purchases of any commodity for future delivery on or subject to the rules of any futures market to the extent that such purchases are offset by sales of the same cash commodity.

 

I

Invisible supply: Usually refers to uncounted stocks in hands of wholesalers, manufacturers, and ultimate consumers; sometimes to producers’ stocks that can- not be accurately counted.

 

L

Life of delivery: Period between first and last trade in any futures delivery contract.

Limited order: An order given to a broker by a customer that has some restrictions upon its execution, such as price or time.

Liquidation: A transaction made in reducing or closing out a long or short position, but more often used in the trade to mean a reduction or closing out of a long position. See also Cover.

Loan prices: The prices at which producers may obtain loans from the government for their crops.

Long: (1) The buying side of an open futures contract. (2) A trader whose net position in the futures market shows an excess of open purchases over open sales.

Lot: Usually any definite quantity of a commodity of uniform grade; the standard unit of trading in the futures market.

 

M

Margin: Cash or equivalent posted as a guarantee of fulfilment of a futures contract (not a part payment or purchase). Can be designated as original or variation margin.

Margin call: Demand for additional funds, or equivalent, because of adverse price movement or some other contingency.

Market order: An order for immediate execution at the best available price.

 

N

Negotiable warehouse receipt: Document issued by warehouse, which guarantees the existence and often specifies the grade of a commodity stored. Facilitates transfer of ownership by the endorsement of receipt’s owner.

Net position: The difference between the open contracts long and the open contracts short held in any one commodity by any individual or group.

Nominal price or nominal quotation: Price quotations on a future and for a period in which no actual trading took place.

 

O

Offer: The willingness to sell at a given price; the opposite of bid. See also Bid.

On opening: A term used to specify execution of an order during the opening.

Open contracts: Contracts that have been bought or sold without the transaction having been completed by subsequent sale, or repurchase, or actual delivery or receipt of a commodity.

Open interest: The number of “open contracts.” It refers to unliquidated purchases or sales and never to their combined total.

Open order: An order that is good until cancelled.

Opening, The: The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made “at the opening.”

Opening price or range: The price or price range recorded during the period designated by the exchange as the official opening.

 

P

Pit: An octagonal platform on the trading floor of an exchange, consisting of steps upon which traders and brokers stand while executing futures trades. See also Ring.

Point: The minimum unit in which changes in futures price may be expressed. (Minimum price fluctuation may be in multiples of points.)

Position: An interest in the market in the form of open commitments.

Premium: The amount by which a given future or quality of a spot commodity sells over another future or quality of a spot commodity.

Price limit: The maximum fluctuation in price of a futures contract permitted during one trading session, as fixed by the rules of a contract market.

Primary markets: When used in connection with foreign-produced commodities, refers to country of production. In domestic commodities, refers to centers that receive commodities directly from country shippers.

Purchase and sale statement (P&S): A statement sent by a commission merchant to a customer when his or her futures position has been reduced to closed out. It shows the amount involved; the price at which the position was acquired and reduced or closed out, respectively; the gross profits or loss; the commission charged; and the net profit or loss on the transaction.

 

R

Range: The difference between the high and the low price of the future during a given period.

Reaction: The downward tendency of a commodity after an advance.

Realizing: When a profit is realized either by a liquidating sale or the repurchase of a short sale.

Resting order: Instruction to buy or sell at figures away from the current level.

Ring: A circular platform on the trading floor of an exchange, consisting of steps upon which traders and brokers stand while executing futures trades. See also Pit.

Round lot: The trading unit in which the major portion of trading occurs on those exchanges that make provisions for trading in two different units; prices of transactions in such units only are registered as official quotations.

Round turn: The execution of the same principal of a purchase transaction and a sales transaction that offset each other.

 

S

Short: (1) The selling of an open futures contract. (2) A trader whose net position in the futures market shows all excess of open sales over open purchases. See also Long.

Spot commodity: The actual physical commodity, as distinguished from the futures. See also Cash commodity.

Spot price: The price at which the spot or cash commodity is selling. In grain trading, it is called the “cash” price.

Stop loss order or stop: An order that only takes place when the market reaches the level mentioned in the order. Its purpose is to limit losses. It may be either a buying order or a selling order An example would be “Sell Two October Cotton at 37.50 Stop.” This indicates the person has bought at a price higher than 37.50 and wants to limit his or her loss to around the 37.50 level.

Straddle: Usually, refers to purchase in one market and simultaneous sale of the same commodity in some other market. It can refer to purchase of one commodity against the sale of a different commodity, both of which should normally be closely allied in price movements.

Switching: Simultaneously buying a contract for futures delivery in one month while selling a contract of the same commodity in another delivery month on the same exchange.

 

T

Tenders: Issuance of transferable notices announcing the intention of tendering or delivering the actual commodity.

Transferable notice: Notice given by the seller of a futures contract that he or she has made preparation for actual delivery.

 

V

Visible supply: Usually refers to supplies of a commodity in recognized distribution centres, which have been moved from production areas to shipping centres. It varies with different commodities and often includes afloats and all other supplies “in sight.”

Volume of trading or sales: Represents a simple addition of successive futures transactions. (A transaction consists of a purchase and a matching sale.)

 

W

Wire house: A firm operating a private wire to its own branch offices or to other firms.