How to trade commodities today?
Сommodities are one of the foundations of the global trading system. For a serious trader, it is vital to know how to trade it: a large profit can be made if the trader has in-depth knowledge in matters affecting the prices of goods and understands how to trade them.
Emergence of online commodity trading means that access to global markets is now available to private traders with a modest amount of capital. In simple terms: you don’t have to invest a big amount of capital to make money on commodities.
What is a commodity?
Commodity is the main goods or raw material in trade, which is being resold by individuals or institutions. What distinguishes exchange commodities from other types of goods is that they are standardized and interchangeable with other goods of the same type. This means that two equivalent units of the same product must have the same prices anywhere in the world (*excluding local factors such as freight costs and taxes).
Typically, these products are mined, grown, produced, and sold in large enough quantities to support liquid and mostly efficient global trade markets.
Main commodity categories
Сommodities, as a rule, can be divided into four categories:
Agriculture:
this category includes food crops (corn, cotton and soybeans), livestock (cattle).
Energy industry:
this includes petroleum products such as oil and gasoline, natural gas, fuel oil, coal, uranium (used to produce nuclear energy), ethanol and electricity.
Metals:
precious metals (gold, silver, platinum and palladium) and base metals (aluminum, nickel, steel, iron ore, tin and zinc). Environmental products: renewable energy certificates and white certificates.
How to profit from trading in commodities?
As with stocks and bonds, speculators in commodity markets tend to buy an asset at a lower price and sell it at a higher price.
However, commodity trading differs from stock trading in three important ways:
- 1. Leverage: futures markets are the most liquid to trade in, as they offer traders much more leverage than stock markets.
- 2. Volatility: Commodities can be much more volatile than stocks and bonds. Many of the factors affecting supply and demand can be very difficult to predict (for example, weather, political instability, strikes, planting season, etc.). When these factors change, commodity markets can make sudden and abrupt price adjustments.
- 3. Analytical indicators: stock and bond markets have analytical indicators that determine the movement of prices. The ratio of pricearnings, interest rates and credit ratings are some of the financial indicators that traders use to analyze stocks and bonds. Exchange commodities have few such reliable indicators. Price movement is usually due to short-term, medium-term or long-term market sentiment. As a result, analysis of commodity markets is much more complicated.
Given these problems, it can be concluded that commodity trading can both bring high profits and pose a risk of failure. However, with the right approach, investment in commodities can be a profitable addition to the investment portfolio.