Like a stock exchange, a commodity exchange is also an organized market that functions under established rules and regulations. This market is meant for the purchase and sale of commodities. The commodities, which are generally traded in at the commodity exchanges, include natural produce of the soil, mineral products like lead, copper and some manufactured products like cotton goods, hides, skins, and sugar.

All of commodities do not lend themselves to dealings on the commodity exchanges. Generally speaking, products, which possess certain predefined characteristics, are dealt in at the exchanges. The commodity must be homogeneous, that is to say, all units of the lot of a particular commodity must be perfectly identical so that all dealers may mean the same commodity when they mention it in their dealings.

The commodity concerned should be such as will lend itself to grading. Unless it can be classified into recognized and well-known grades, trading will not be very quick, for every time the quality will have to be ascertained. In commodity exchanges, grades of commodities serve as a sufficient indication of the intention of the dealers. Commodities must be durable so as to last for the period of a future contract (ordinarily more than one year). If it perishes rather quickly, contracts for its purchase and sale will be frustrated.

The trading in the commodity must be sufficiently large so as to support the cost of facilities for the purpose provided by the exchange. In other words, there must be steady demand for the commodity. There must be frequent fluctuations in the price of the commodity. If that is not so, the speculators will have no incentive to speculate in it at the exchange. The supply of the commodity must be free and open, and should not be monopolized or controlled by one or a few persons. In addition, the government must not control the supply, and its price must not be regulated by government action.