Commodities
A commodity is a basic good that is traded in large quantities with other goods. Commodities
are essential to the global economy and are traded on exchanges worldwide.
Commodities trading is similar to trading in other markets, where buyers and sellers come
together to exchange goods. For investors, trading commodities can be a valuable way to
diversify their portfolios beyond just stocks and bonds. The commodity market is one of the
oldest financial markets, and today, traders can buy and sell commodities on the futures
market or through derivatives like Contracts for Difference (CFDs)
Commodity Categories
Commodities fall into two broad categories: hard and soft commodities. Commodities can be
traded directly in spot markets or through contracts that deal with their current or future
prices.
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Hard commodities are natural resources that are mined or extracted such as precious metals (gold, silver), rubber, natural gas and crude oil.
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Soft commodities are agricultural products or livestock, such as corn, wheat, coffee, sugar, soybeans and others.
Commodity Spot
A commodity spot refers to a transaction where a commodity is bought or sold for immediate delivery and payment. In the spot market, prices reflect the current value of the commodity. Unlike futures contracts, which are for future delivery, spot transactions settle "on the spot," meaning the buyer receives the commodity right away, and payment is made immediately.
Commodity Futures
The futures market is a direct way to trade commodities through futures contracts, which are legal agreements to buy or sell a specific commodity at a predetermined price on a set date in the future. These contracts typically require a larger capital investment compared to other trading methods. Futures trading allows investors to hedge against price fluctuations and speculate on future price movements, making it a crucial part of the commodity market.
Commodity CFDs
Commodity CFDs (Contracts for Difference) are financial derivatives that allow traders to speculate on the price movements of raw goods, such as agricultural products, precious metals, and oil, without actually owning the physical commodities.
Commodity CFD trading involves buying and selling these contracts in financial markets. Traders speculate on commodity prices, which are influenced by factors like supply, demand, and global events. This method provides a way to diversify portfolios and participate in the price fluctuations of these essential goods’ values.
How to Earn
Earning in commodity trading as a new investor requires education, strategic planning, and discipline. Begin by understanding key market factors that influence prices, such as supply and demand, geopolitical events, and economic indicators.
Choose specific commodities to trade, whether energy or agricultural products. Use tools like charts and news feeds to identify opportunities and make informed decisions.
Implement strong risk management strategies by setting stop-loss orders, diversifying investments, and determining appropriate position sizes to protect your capital. Opt for trading platforms that provide real-time data and resources. Practice with a demo account to refine your strategies risk-free, and stay updated on market trends. With patience and emotional control, you can build a solid foundation for profitable trading.
CFD Commodity Trading
Commodity CFDs (Contracts for Difference) enable traders to trade on margin, requiring only a percentage of the total trade value. This allows for lower capital investment compared to futures contracts and provides opportunities to profit from both rising and falling markets. Example: Traders can open a 'Sell' (short) position to profit from price declines. To start trading commodity CFDs, follow these steps:
Select your market: Choose the commodity you want to trade.
Select the direction of your trade: Decide to buy (go long) if you expect prices to rise or sell (go short) if you anticipate a decline.
Set the volume of the trade: Implement tools like Stop Loss and Stop Limit to manage risk.
Monitor your position: Keep track of your trade and available funds, as market conditions can change rapidly.
Terms to Know
Futures Contracts - A legal agreement to buy or sell a specific quantity of a commodity at a predetermined price on a specified date in the future.
Spot Price - The current market price at which a commodity can be bought or sold for immediate delivery.
Contango - A market condition where the futures price of a commodity is higher than the expected spot price at contract maturity. This often occurs when there are storage costs or supply is expected to increase.
Backwardation - A market condition where the futures price is lower than the expected spot price at contract maturity, typically indicating current high demand or low supply.
Basis - The difference between the spot price of a commodity and the futures price. It can be positive (over) or negative (under), depending on market conditions.
Something nobody tells anybody……
Commodity markets are distinct because their prices are influenced by different factors than those affecting currency, bonds, and equity markets. Trading commodities can be risky, especially for those unfamiliar with the factors that impact supply and demand. Prices can be affected by storage levels, unusual weather, natural disasters, epidemics, political decisions, conflicts, wars, and other events. This unpredictability and lack of control over such factors contribute to the volatility of commodity prices.
