Whether you are a stock market veteran or an absolute beginner, you might not be well-versed with the ins-and-outs of commodities trading. Although you may have heard the words before, you might not understand what commodities are or how they are traded. If you want to expand your investment horizons and explore different ways to potentially make a profit, the commodities market might be the right option for you. Our handy guide will give you a complete lowdown on what the commodities market is like and provide you with the essential knowledge you need to step into a new realm of trading.
What is Commodities Trading?
Before jumping into the commodities market, it is important you know exactly what the term ‘commodity’ entails. Commodities include any natural resources, like iron ore, agricultural produce, precious metals, fossil fuels, etc. Similar to how shares are the tradable unit on the stock market, commodities are what is bought and sold on the commodities market. The primary distinction between stocks and commodities is that the former is a financial contract; the latter is a tangible object.
Trading on the commodities market occurs based on the changes in the prices of commodities. The price of a commodity will shift depending on various factors like the supply and demand dynamics and the economic conditions of a country. For instance, if a country experiences a severe drought, the prices of agricultural produce will rise. Similarly, if oil production in the Middle East increases rapidly, the price of oil across the globe will drop.
Investors who trade on the commodities market leverage the supply-demand trends to earn profits. Simultaneously, they also mitigate risks by creating a diverse portfolio and investing in different assets. One of the primary benefits of trading on the commodities market is the possibility of protecting your investments against macroeconomic factors like inflation and differentiated exposure from the stock market.
Types of Commodity Trading
As a trader, you can use trading platforms in the UAE to incorporate commodities into your portfolio in various ways. Here are the different types of commodities trading you must know about:
Commodity Futures: One of the most common ways to trade in commodities on any trading platform in the UAE is through a futures contract. A futures contract allows an investor to create an agreement with another investor regarding the future price of a commodity. However, as an investor, you do have to set up a specialty broker account to invest in futures trading. You can approach any of the best brokers in the UAE to open an account that enables future and options trading. Every time you open or close a position, the broker receives a commission in exchange for helping you execute the trade.
Physical Commodity: When you trade as per a futures contract, you are not actually buying or selling the commodity itself. Instead, you are only investing in your estimation of the price fluctuations. However, if you want to trade in precious metals like gold, silver, and platinum, you can do so while physically investing and possessing the commodity. You can own these commodities as jewels, gold coins, bars, etc. Although such transactions allow you to own a commodity physically, they also deal with precious metals and can cost more than a regular commodities exchange.
Commodities Stocks: Lastly, you can also deal in commodities by buying the stock of a company dealing in that particular commodity. For instance, you may want to invest in oil. Instead of investing in the commodity itself, you can buy shares of an oil refining company. The stocks of these companies will follow the price of the actual commodity. So, when the price of oil rises, so will the value of the oil refining company’s stocks. Often, investing in commodity stocks is less risky than directly trading with a commodity. An established company can help you earn a profit even when the value of a commodity is low. However, the alternate could also be true.
Commodity Trading vs Stock Market: What’s Better?
While investing in the stock market has been a popular option for quite a while, commodities trading is also gaining traction. Let’s explore the crucial differences between the two kinds of trading and see if we can determine which is better.
Leverage: Leveraging is more common and popular in the commodity market than it is in stock trading. Leverage allows investors to park only a certain percentage of the money they need to complete their investment. For example, a futures contract only requires investors to maintain a minimum balance based on the expected value of the trade. If it looks like the investor might suffer a loss, they face a margin call and will have to bring back the minimum value by depositing more capital. Trading on margin can allow investors to earn greater returns than the stock market; however, it can also cause great losses.
Duration: If you trade in a commodity, your investment is most likely to be a short-term one, especially if the futures contract has an expiry. On the other hand, on the stock market you have the option to hold assets for as short or long as you want. Similarly, the commodity market is open for trading all-round-the-clock whereas the stock market operates during business hours and only when the exchanges are open and functioning.
When you compare these two factors, you get the room to make a subjective call. If you have a higher risk tolerance, commodity trading can fetch you great returns in a short amount of time. However, if you prefer less risky alternatives and are comfortable with longer investment horizons, then the stock market could be right up your alley. While you can trade in stocks and commodities to create a rounded portfolio, the choice to pick one rests on your financial goals and risk appetite.
If you want to trade in commodities, you need a trusted broker. At Orient Finance, we have built a credible reputation as one of the best online brokers in the UAE over the last two decades. We offer an array of services that make trading in Dubai or any other region across the Middle East seamless, safe, and quick. From opening a trading account in just minutes and keeping track of your transactions to finding educational resources, our online trading platform in the UAE lets you do it all.
