by Debbie Paulsen

Created on: October 25, 2008   Last Updated: October 30, 2008

For many, understanding the stock market, and how it works is like trying to read Greek, or Latin. We are familiar with terms, like supply and demand, and commodity markets, we have heard them used often, but what do they really mean? How do they affect our investments?

Commodities are consumable products. Corn and grains, aluminum, copper, and oil, are examples of commodities. The gas used in your car, was refined from the commodity oil. Cereals on your table, are produced from commodities, such as corn and grains. When the demand for a commodity becomes so great, supplies can run low. When this happens, manufacturers must compete, to obtain their share,necessary to continue producing their finished product. What we see with corn prices today is one example how commodities affect these big companies, and stock investments.

The climb in the cost of farm produced goods, like corn, was due initially to a rise in fuel costs. Additional demands were created by development of new uses for the commodity, like increased high fructose corn syrup production, and the expanding bio fuels market. Demand has become greater than supply can easily meet. Thus the price of corn has sky rocketed. The increase in the price, to companies like General Mills (GIS), and Kelloggs(K), that rely on corn to produce cereals, means they must either raise the price to the consumer, or absorb the loss caused by the cost increase.

If we follow commodity fluctuations in the market, using the producer price index [PPI], we can sometimes gauge in advance how certain aspects of the market will respond. CFD ( Contract for difference) traders have been doing this, and have enjoyed a good run for some time now. CFD's are not the same as owning stock options. With CFD's, the investors are pretty much gambling. They do not buy in to the commodities stock, they are just 'hedging bets' on whether the price will go up, or down.

If CFD traders for example, think steel is going to fall, they ' place their bets', if steel falls, they get a payout. It is as the steel prices drop though, that we may expect to see prices fluctuate in the market. Stocks like General Motors (GM), and Ford(F) for example, can start to rise, as production costs drop, thereby raising profit margins. Commodities, like grain and corn prices affect many companies. Poultry producers, like Tyson Foods (TSN) need to feed their chickens, and ConAgra Foods (CAG), which uses large quantities of beef in their processed food lines, will see their overhead expenses rise. Following commodities can provide a heads up, before the bottom line of the companies are actually affected.

Following commodities can be a useful tool for predicting upcoming market turns. For example CFD traders predict a softening in the prices of lead in the near future, if lead prices were to drop drastically, this could in turn have a beneficial effect on a company, such as Axion(AXPW), just for an example, which uses large quantities of lead in the production of their finished product, batteries.

Commodity prices definitely influence the ups and downs that the stock market can go through. Because of this, investors should keep an eye on the rise and falls in the commodities market. The next big drop in a commodity, could mean a substantial increase in a corresponding companies stock prices.

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