Understanding Commodities Trading
What are commodities?
Commodities refer to materials or items that exist in nature. These are collected and refined for human use such as oil, sugar, and precious metals. These are at the heart of our economy since raw materials are imperative to produce food, energy, and clothing.
Commodities are generally produced in bulk and standardized to ensure the quality is maintained and quantity also remains constant. This implies that the price remains unchanged irrespective of who produces them. Visit multibank group
Similar to stocks, commodities are also purchased and sold on exchanges.
Types of commodities
- Hard commodities
These refer to natural resources that need to be physically mined or extracted like gold, oil, copper, and natural gas
- Soft commodities
Soft commodities are the ones that have to be grown and harvested or perhaps even reared. Some examples would be tea, coffee, wheat, and cattle respectively.
You might also notice that commodities are divided into several different categories to account for various purposes or the processes which are part of production. These categories are as follows:
- Energies: traditional forms of energy like crude oil, gasoline, and heating oil
- Metals: mined commodities are inclusive of gold, copper, silver, and palladium
- Agricultural: commodities that are planted and harvested for consumption like sugar and coffee to name a few.
- Livestock and meat: animals that reared to consume as food or transformed further as products such as leather and gelatine.
What moves a commodity’s price
Commodities’ prices are steered by supply and demand forces, which implies that there are a number of aspects that affect them.To read more informative blogs visit starpod.
Bringing alternative technologies and goods into the picture can cut down the demand for older commodities. For instance, now that there is a lot of focus on renewable energies, the amount of investment going into oil and gas has reduced.
There is a chance of having a knock-on effect in the market as new companies enter. It is more so the case when they have better supply chains and faster production lines, as these would cut down costs and turn out to be a better pick for shareholders.
Political events and policies could lead to price changes if they affect exports and imports. For instance, prices could increase if import duty goes up.
A weak economy tends to bring down the demand for commodities, particularly the ones which include building and transport. On the other hand, if the economy is doing well, there could be a spike in demand, thereby leading to higher rates.
Agricultural commodities depend heavily on seasonal cycles which affect production and harvesting. Prices have the tendency to increase in case of positive harvest forecasts and fall after the harvest when the market has a solid influx of products.
Extreme weather changes and natural disasters can affect the production of natural items and also their transportation. For instance, if the temperatures are too cold, the ground could freeze, negatively affecting the quality of the goods. Any factor which could have an impact on the supply chain and decrease output could make the prices go up.
How commodities trading works
Commodities trading is similar to speculating in different financial markets where buyers and sellers exchange goods on a single platform. What differentiates them is that you can buy or sell the commodities at a current and future price.
There are many ways to get exposed to commodity prices. What you need to do in order to purchase or sell commodities would rely on what you’re trading. It could be futures, spot prices or options, or investing in stocks and ETFs.
Trading commodity futures
Futures refer to contracts that exchange an asset at a certain rate and on a particular date in the future. Trading futures is in fact similar to getting a CFD on the underlying futures price.
Trading commodity spot prices
While on one hand futures prices are a reflection of the market’s mood on a commodity and its future worth, spot prices reflect their present worth. They are a reflection of the underlying market without any fixed expiries which makes them a good pick for beginners as well as seasoned players.
Trading commodity options
With options, you have the right to exchange an asset at a particular price on a particular date but are not under any obligation to do so. In this case, you’d trade underlying commodity futures prices on US crude, gold, and silver.
Trading in stocks and ETFs
As you trade stocks and ETFs with CFDs, you can pick if you’d like to take a long position or short.
Why trade commodities?
The commodities market is lucrative for traders as:
A safe haven
Certain commodities, like gold, could turn out to be a good investment in turbulent times as it retains value. In fact, the value could even increase when the economic conditions get tough.
Drastic swings in commodity prices imply that when armed with appropriate knowledge, you can make the most of price movements when the markets are liquid.
A diversified portfolio
Increased exposure to commodities makes it easier to diversify your portfolio since they give an overall picture that depicts the connection between equities and bonds.
A trader can be in control of a large sum of money by making small deposits with the help of ‘leverage’. This could help you increase your gains as well as your losses.
Protective hedge against inflation
Economic crises, natural disasters, war-like situations can be unpredictable. It could adversely affect the economy as well as the buying capacity of currencies in case of inflation.
Since commodity prices tend to be very volatile, it works in favour of the traders as it opens several trading opportunities. Traders could also earn from both upward as well as downward price movements. Know more تاجر المضاربة
TIPS FOR TRADING COMMODITIES
- Stay on top of commodity news and analysis where experts assess key commodity price developments
- Before you open a new trade, establish your risk-reward ratio.
- Work with an economic calendar to keep track of the dates and times of crucial data releases.
- Traders must keep working on updating their knowledge and skills.