Definition of 'Baltic Dry Index (BDI)
It is a shipping and trade index which has been created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and time to delivery (speed). To make it easier for a layman to understand we can say that that Baltic Dry Index is a composite of three sub-indexes that measure different sizes of dry bulk carriers (merchant ships) - Capesize, Supramax and Panamax. It incorporates evaluation based on multiple geographic routes for each index and this is the reason that it provides depth to the index's composite measurement. It is also known as the "Dry Bulk Index".
We will like to explain 'Baltic Dry Index (BDI)' as the variation in the Baltic Dry Index which provides the investors an insight into global supply and demand trends. This change is often considered a leading indicator of future economic growth (if the index is rising) or contraction (index is falling) because the goods shipped are raw, pre-production material, which is typically an area with very low levels of speculation.
This example will make it all the more clear to understand this index by considering the supply of large carriers tends to remain very tight, with long lead times and high production costs, the index can experience high levels of volatility if global demand increases or drops off suddenly. The Baltic Exchange also operates as a maker of markets in freight derivatives, a type of forward contract known as FFAs (forward freight agreements) that are traded over-the-counter.
Thus it is very essential as a stock market trader to keep track of this index as it can provide one with an early warning of the likely prevailing trend in the market in near future. Thus it is aptly said that tools and conditions do exist where by one can forecast the likely direction of the market provided one has an eagle’s eye and an aptitude to track, recognise and act on it to make quick bucks/money in the market.
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