If you are interested in trading but can’t seem to find the right thing – and after researching forex, stocks, crypto… you’re at a loss. One of the most enjoyable ways to trade is trading in commodities – even though it is much less talked about.
What is commodity trading?
In basic terms, commodity trading is when a trader trades raw materials, providers like Eightcap offers commodity trading. It could be called the very basis of what the rest of our economy is built on. Commodity trading can be broken down into two categories: financial trading, which is exchanging commodities, and physical, which is moving those materials between two points.
What are the types of commodities?
Commodities are referred to as soft or hard. Soft commodities are grown or ranched, while hard commodities are drilled or mined.
Here are some committees that you can trade:
- Metals: Defined as hard commodities and include silver, gold, aluminum, palladium and copper.
- Meat and livestock: Knowns as soft commodities, things as dairy (milk), beef, cattle, pork, and more.
- Agricultural: defined as soft commodities like cotton, wood, wheat, and coffee.
- Energy: Known as hard commodities and include propane, coal, unleaded gas, crude oil, and natural gas.
Here are some of the defining features of commodities:
- The price of commodities is extremely volatile.
- Supplies are limited based on location.
- The products are ‘standard’ or uniform.
- They are raw materials or natural resources that are needed in every economy.
- These products are shipped in bulk quantities.
How do commodities and the stock market differ?
One of the biggest factors impacting commodities is supply and demand – for example, if there is a bumper crop of potatoes, the price will go down – because there are so many of that commodities. When the prices rise, the supply drops, or there is a fear that they will drop.
It can also be seen when the demand for gas rises during the winter as people consume more to keep their homes and buildings warm – the prices of this commodity will spike. This can be seen as fuel prices skyrocketing, and people can’t afford to fill their gas tanks and heat their homes.
Stock prices will likely go up and down based on product breakthroughs, unforeseen events, mergers and acquisitions, negotiations (like recently seen when Brexit was being negotiated), and politics.
How can you trade in commodities?
One of the most popular ways to trade commodities is through future contracts. This obligation is to buy or sell a commodity at a set date and price. When dealing in futures, these are usually short-term investments and would be considered shorter than when you invest in shares.
You can describe a commodity’s future by the month it expires. For example, a contract ending in April would be called an April futures contract.
Buyers and sellers can “lock in” a commodity’s price today for future delivery by using futures contracts.
Futures contracts are another tool to speculate on commodities prices. Certain commodities do have a high degree of price volatility, meaning that their price can change considerably in a short amount of time. Large earnings are possible as a result (or losses).
You must sign up with a trading platform that supports commodities trading if you want to trade futures. Because there are so many exchanges, commodities can be exchanged practically continuously.
Can you indirectly trade in commodities?
Yes. It is possible to deal indirectly with commodities. You can invest in commodities without ever trading in the asset directly. Here are some options for trading indirectly in commodities:
Shares in commodity-based companies: Any companies that mine, process, or produce commodities and benefit from price increases in commodity price when they sell their products at a higher than average price.
Exchange-traded products: These are written as ETCs and ETFs (exchange-traded funds). These are low-cost ways to invest in commodities. The differentiator is that ETCs track commodity prices while ETFs will track the performance of an index.
Collective investments: Investment trust and commodity funds will invest in a portfolio of companies that include energy, agriculture (often shortened to agri), and precious metals.
Who should invest in commodities?
People with some experience in investments and those who are just learning will know that one of the most important things when it comes to investments is that you should make sure you have a diverse portfolio—adding commodities to a portfolio that also has stocks and real estate.
One thing that makes commodities such an interesting prospect to investors is that they are considered a ‘safe haven’ when all other markets are crashing. Over time this can lead to much higher returns.
While diversification of portfolios is important, commodities come with a higher risk and are; therefore, a preference for people who can afford to (and don’t mind) take risks on short-term losses in favor of long-term gains.