In the global trading system, commodity trading considered as the foundation. If offer endless opportunities to trade and earn to those who have in-depth expertise and knowledge of this market.
Those who know how to trade it and understand the main drivers of this market they can earn with consistency. Online commodity trading means access to the global commodity trading market through an online trading platform.
A commodity may be a basic good like wheat and gold or a raw material just like Ore which bought and sold by individuals or institutions. Commodities used for very basic purpose and for complex goods and services.
These are natural resources which have the global market means supply and demand from around the globe. The most important characteristic of commodities is the societies need them and they fluctuate a lot which creates opportunities for investors and speculators to get the benefit of price movement.
Commodity trading market helps to maintain the prices with the future contracts by allowing the supplier and consumers to lock in the price for future supply and deliveries.
Majority of commodities have limited and fixed supply and have limited geographic distribution. Only certain countries and companies have access to specific commodities. To handle the distribution and to address the needs and the global market developed whom we call commodity Trading Market.
Uniformity and fungibility are the two most important qualities of commodities, like silver is silver and gold is gold. Commodities are fully fungible. There are some commodities like oil and agriculture commodities graded as per their quality so their characteristics are fairly uniform and therefore fungible.
Start of Commodity Trading
At first rice, trading was started in China around 6000 years ago. In the united states, grain market first developed in the 19th century to cater need of food. In the 20th century, this industry expanded and totally took a new shape like metals and live stocks added into this market.
Categories of the Commodity Trading Market
Within the commodity trading, the Commodities can commonly be divided into five categories. These categories define the commodity market as a whole, each commodity in these categories is tradable. These are;
There is a wise list of agriculture commodities basically these are mainly grown or produced by the farmers as an end product or as a raw material. Few Most commonly traded agriculture commodities are asunder,
Majority of the crop which is used by the world grows in the six countries and for centuries they are enjoying the profits from this commodity. This is the top of the list and the most important commodity in the world. Majority of our daily routine food items are made with it.
In the commodity trading market, the price of wheat does not fluctuate much but from the harvesting season to onward it changes. For investors, this is a stable commodity to invest in harvesting time. Maize and barley prices are usually compared with the wheat as both are in a similar category. The demand for Wheat and trading volume in the commodity trading online is increasing with the count of time. Especially demand is increasing in developing nations.
Well, this is the only sweetener on the earth but due to technology advancement, it is also being used for the production of ethanol fuel. Well is publicly traded in the commodity trading market but in each and every country govt remain involved in it. As shortage and excess of this commodity, both can create problems for producers as well as for consumers.
It is really an interesting commodity to trade in the commodity trading online market because often produce anomalies in price as govt. offer subsidies and impose tariffs on it from time to time. Nearly all the countries are producing sugar but there are ten largest producing nations where more than 60% of sugar is being produced.
This is the most frequently trading commodity and now a day’s china and Brazil are the major producers. There are many other countries which are on top but those counties are not exporting much. Like the USA and India, they use most of their cotton and convert that to valuable items.
Global economies are growing cotton at a healthy pace because the majority from there consider it safe heaven as it plays an important role in the countries economy. Investing in cotton is a way to hedge against the risk for many of internarial players.
The global coffee industry is a big one and in commodity trading, volume and liquidity remain at the highest all the time. It is 1.6% of the GDP in the united states and there is an estimation that 1.7 million jobs are directly connected directly with the Coffee industry along in united states.
For the overwhelming supply whole world is just dependent on the five coffee producing countries. The coffee industry is considered an emerging market and continue to grow over time. For traders in the commodity trading online business, this is the most profitable commodity to trade. There are proven spread and price cycles which traders follow to make money while analyzing the previous data.
First found in the 15th century but remain unknow for most and in the 19th century, it becomes common. Thereafter in 1945, the formula of concentrated juice was invented which make it possible to freeze the orange juice and protect it for longer time periods. After that ear from 1945, it is being actively traded among all nations. It is a popular global commodity traded in the future commodity market. At this moment his is a multi-billion Dollar industry.
Brazil, USA, Mexico, EU, China, Argentina, Turkey, South Korea, Australia are the main producers of the Orange Juice and main exporters as well.
This is one which traded whole year in the commodity trading online market nearly with the same volume as storage is easy and less fumigation is required as compared to other commodities. Which make it easy to trade for traders who deal with the physical deliveries.
It is a multi-purpose commodity with several important usages in the world economy. You will be amazed to know that it is also a food source for livestock and being used to produce ethanol fuel.
Especially in the united states, it replaces the sugar in the sweetening industry due to the higher cost of sugar. Now it is the key ingredients for soft drinks, ketchup, and candies.
Growing Fuel, sweetening industry and food demand is making this commodity more demanding.
It is an important part of global food ecosystem. Many products like Bread, crackers, Cake, Cookies and salad dressing are made directly with the soybeans or with the soybean oil. Mainly oil is extracted from this commodity for several usages. After extracting oil the reaming’s are used as a enrich source for animal food. And the practice is the same all over the world.
It is also used in the production of biofuel. The growing need for food and biofuel are two drivers behind the demand for soybean. This is a major product to trade in the commodity trading online market and round the year it remains highly liquid. USA and Brazil are two major producers of Soybean.
All the products which are used as raw material to produce energy fall in the category of energy commodities and these are actively traded in the commodity trading market.
I always call it a politically backed commodity as all politics from around the globe is involved in it. Every decision about oil exploration, sale and rates always have a political impact. It is used in a variety of transport services. Ans it is the main source of energy in the world. The petrochemical industry is also dependent on this commodity. In the online commodity trading, traders use it for speculation as well as for inflation hedge.
It is the most unpredictable one too. So when you step in your need to back your trading decision on the good parameters.
It is a commodity which is used in large scale industrial project as well as also used by the residential consumers. Nowadays this is a cheap source for electricity generation. USA and Russia are the largest producers of the energy commodity. Due to its excessive use of this commodity in the production of electricity, its demand is continuously increasing.
This is a product which is needed more in the winter season and has great demand in the areas which remian are cold. Business with active operations and where countries which are building more houses are the reason for its demand.
In the international market, its price fluctuates a lot and this is the reason energy traders prefer to keep it in the portfolio.
From the very first day when it was discovered to until now it was only used for the source of energy. Millions of years biological processes change it into coal.
Cavemen used this commodity to heat their caves . At this moment 41% of electricity is produced with the Coal. Australia is the top producer of Coal and biggest exporter which export it to the whole world. Even China is exporting coal but in limited quantity. Prices are volatile just like oil so in the commodity trading online traders prefer to speculate it and investors love to hold especially they buy in the summer and sell their stocks in the winner when price rise.
Grains and sugar are the main sources to produce this colorless commodity. Made from the biomass and it is perfectly renewable energy. To make a cleaner burning fuel ethanol always mixed with the gasoline and diesel fuels. Which is used in cars and busses, that is also used to save the environment The history of ethanol is 200 years old. Samuel Morey was the first man who used ethanol fuel to power an engine. And it left behind kerosene as a lightening fuel.
It is the most prolific form of energy and being traded in the shape of the commodity in the online commodity trading. People are well aware of the electricity and using it from decades. It is really a great invention which transforms human living totally and helps the human to advance with more speed. 100 years ago, societies were dependent on the sunlight and productivity was limited and the candle was the source to get light in the night.
Nowadays we take it for granted and use it without any doubt that it will remain present. We know well input is required to generate electricity and electric generators are used for this purpose.
It was used from decades but in the 19th century it was isolated as an element and that was the real birth of uranium and trading become possible. Now it is being used in warfare and only big players are involved in physical trading while in trading commodity online everyone can trade it as a future contract.
This category includes all precious metals and industrial metals. In commodity trading market metals are the highest volume players. Most commonly traded metals are,
This is the commodity in the future market which is at the top due to its attraction, liquidity, and volatility. It is a fascinating one especially for day traders as well as for speculators. One major benefit of trading gold is, it remains alive all week. Demand for this yellow metal derives from speculators.
It is also considered as the save heaven when investors feel unsafe or experience uncertainty in the financial market. Price of yellow metal often moves in the opposite direction from the dollar that is also a reason for its attraction. Hedge funds trade this metal to diversify their portfolios. If you are planning to jump in the commodity trading online then focus on this metal. If you learn to trade it then you can earn a lot.
It is most demanding metal in Asia because there it is heavily used to make ornaments.
Basically, this commodity is used for the industrial purpose and most of the time it is being traded in the big quantity. It has so many industrial usages. We can say that without copper it’s not possible to build infrastructure. Majority of world commodity traders invest in the copper when they find that the world economy is progressing.
It is known as the poor man’s gold. Participants in this industry think that the one who is limited in the finances. He can trade the silver instead of gold and can make money. Speculators always remain active and always receive demand due to short-lived positions.
On the other side, this metal commodity is also used to make jewelry and in other industries as well. Spread traders also consider trading the spread between Gold and silver. Which create multiple good opportunities in a month.
When you are buying platinum there you are betting on the industrial growth as well as global growth. Not commonly traded by all of the traders. In the commodity trading online market this is a favorite metal commodity for the long-term investors.
As they trade price cycles and prefer to trade spreads as well. It is also considered to hedge against the US dollar so when USD is in the weak conditions there, we may see rising demand of this metal. Basically, it is used in the industries and most of its contracts are delivered physically.
Manufacturers are using this metal in auto industries as well as it is being used in the infrastructure projects. It is used to improve the quality of the product and it also makes them durable.
It is used for catalytic reactions in industry, that is its major usage in the large-scale industry such as in hydrogenation of unsaturated hydrocarbons. On the other side, it is also being used in the in jewelry and in dental fillings as well as crowns. But it receives major demand from industries.
In the pure form, it is a soft grayish metal. Even you can say that it is grayish white metal. It is the most commonly traded commodity in the commodity trading.
It cannot be found in nature. It is always found in the shape of raw minerals and then purified into the iron. Iron oxide minerals usually found near the earth surface.
The commercial producers of iron mine the minerals and then process them to get the iron content. If we consider its reusability then it’s on the first number as most of the iron in the world is reused again and again for a different purpose.
Investors in the commodity trading online love to invest in this commodity as it always remains stable there is no chance of huge loss.
It is a blend mostly made of iron. It contains less amount of carbon, sulfur, and oxygen as compared to the Iron. This is the reason it is stronger than iron. Cargo ships and construction industry is heavily dependent on this commodity. So far 1600 Million metric tons are being produced globally at this moment and demand is still rising.
Investing in the Aluminum is a way to bet on the global GDP as it directly connected with production growth. China is a country which has the highest demand of the Aluminum. They use it in the new infrastructure and new projects and demand in China is still increasing. Metal traders always use this metal to diversify their portfolio.
On the other side, the aluminum used in the manufacturing industries and that reasoned the highest demand from China.
It is another commodity which traders love to trade to hedge the weak US dollar portfolio. There are three reasons to trade Zinc. The very first one is to bet on the strong global economy. The second one is Inflation and third reasons are weak US dollar.
There is a limited supply of risk so the industries which consume it as raw materials they always remain in stocks.
It is a rock from which metal Iron is extracted.
Formally isolated and named an element in 1751 by the Swedish scientists. It is used to strengthen the iron by creating an alloy of both.
All of these commodities are obtained from the livestock. In the commodity trading market of developed nations, these commodities are traded very commonly. Most commonly trade livestock commodities are,
In the commodity trading market meat is also being traded. You can say that such perishable items also actively traded, and most trading volume comes from the people who take physical deliveries. While speculators are also there to take benefit of price. I believe that this commodity is hard to trade and demand and supply play its role in the determination of supply.
Pork bellies are cut of meat and it is taken from the stomach of the pig. It is being used for bacon production because of high fats. In 2011 CME end the trading of pork bellies but it is still being traded in other exchanges.
In actual it is a complex business to do and highly risky too. The success of this business depends on animal husbandry and good decisions, like when your animals are ready for slaughter.
When the feeder cattle reach the weight of 600 to 800 pounds than cattle producers feed, then a special diet to promote weight gain. When they gain weight about 1400 pounds, they become ready for slaughter. In the next step, sold to the beef producers.
In commodity trading online this livestock commodity pork bellies are traded actively. Worldwide demand for pork bellies reached to 60 million metric tons. Combined with the poultry it is an industry of 1 trillion dollars alone in the united states.
Its worldwide demand reached to 100 million metric tons that is massive one in the livestock. Lean hogs are most actively traded commodity in the online commodity trading. It offers good returns on the time of three to six months.
Lumber is a processed wood used in furniture manufacturing, homebuilding, flooring and many other varieties of industries. Its price and demand vary with the seasons. For long-term investors, it’s really a good commodity to trade as with the long-term investments good returns are possible.
It is an important rubber material derived from the plant it’s by a product called latex. It is cultivated from the rubber plant and then processed to the rubber and used in a variety of industries. As products made with the rubber are most durable.
This commodity got from the sheep and used as a textile fiber. It is durable so mixed with the other fabric raw materials and also used independently. It is being used in blankets, clothing, Carpets, etc
It is a new class of commodities which consists of non-tangible products. CAP and TRADE restrictions are the hurdles which trades face while trading this commodity. Products are,
Cap and trade, baseline and credit are the two ways to trade this commodity in the online commodity trading. Carbon emissions traded in the New York Mercantile Exchange with the code name of RJ.
It’s properly regulated globally and handled with due care because it directly connected with global warming.
RECS Renewable Energy Certificates are traded under the banner of commodities. Trading volume is on rising, green tags and renewable energy credits are also the names of the same commodity. Each REC means a one-megawatt hour of electricity mainly produced with renewable energy sources.
These are energy saving certificates traded in the commodity trading exchanges. Traded in the large volume because of its stable returns and less price fluctuation.
Although there are five main categories there are hundreds of commodities, which traded in commodity trading online market. But here I only enlist which are most liquid and enough trading volume to trade as an investor and speculator.
Crypto Currencies as Commodities
No need of introduction of cryptocurrencies, every individual regardless of age knows well about cryptocurrencies. Cryptocurrency itself is a wise term represents hundreds of digital tokes which are serving different purposes. Bitcoin designed to value and act as a digital currency. Now it got the status of traditional cryptocurrency.
The ripple and Ethereum which comes after the Bitcoin as per popularity and trading volume designed for a specific purpose and niche. With the invention of Bitcoin, the blockchain technology take birth which opens the gate for further exploration and inventions. Also, invite competitors, now hundreds or coins actively traded in the cryptocurrency exchanges. Most of new coins are taking advantage of new blockchain technology. The block chain technology processes the transactions and creates new coins, the computers perform the whole process. In mining, complex equations solved, and the process called mining whereas the results create new coins
In particular cryptocurrency all the information stored in a computerized ledger with the help of the computer. The same ledger shared all across the network with immutable records no one can change them once recorded/created.
With passaging time cryptocurrencies become popular because of decentralization liquidity and high volatility. Their decentralized nature makes them more secure to trade. Many of analyst things that cryptocurrencies will help to break the monopoly of money and banking sector. Transaction cost in cryptocurrency is the minimum as compared to the banking sector.
Regulators of Crypto Currencies
Cryptocurrencies regulated since 2015, the CFTC tasked with the regulating derivatives market, commodities and cryptocurrencies. So, it was first determined in 2015 as a part of commodities.
The US Federal Court has ruled that virtual currencies (like Bitcoin) are commodities–similar to coffee or oil. This was the judgment which totally changed the market and regulators approach towards cryptocurrencies. Even before this judgment CFTC was monitoring the whole industry. The judgment comes as part of a wider commodities fraud case in where most people were scammed, involving an (allegedly) illegitimate cryptocurrency called My Big Coin (MBC).
There is not only one regulator now we know that CFTC claims oversight over the cryptocurrency market. Securities Exchange Commission SEC also set up a Cyber Unit to tackle the fraudulent activities in the virtual currency market. SEC has noted that it views cryptocurrencies/virtual currencies as securities, so they are monitoring this market at their best
Other than above six Zcash, Dash, Monroe, neo are also in the list of top ten cryptocurrencies.
Surprising Similarities Between Commodities and Crypto Currencies
From day to day many market observers share their views about similarities, like many are in the view that gold and Bitcoin Have similarities.
But until now there is no exact study which can tell us about the real correlation between commodities and cryptocurrencies
Personally, I believe that commodities differ from cryptocurrencies but they have similarities. Commodities traded in a highly regulated market while cryptocurrencies are traded in the decentralized environment. It’s just my view while facts are different.
While trading in this market I found following similarities between commodities and cryptocurrencies.
Both are cheap to trade one can get in with the minimum investment particularly compared to equities and bonds. Both are highly liquid and volatile markets which increase the potential of earning.
Singapore and Switzerland have so far succeeded to get the status of popular destinations for cryptocurrencies. It will surprise you to know most of the commodity trading done in these two counties. while UAE is next from a lot of new cryptocurrencies, make the debut. Most of the activity related to the cryptocurrencies achieved in these countries. These three are investment friendly locations for commodity traders.
Just like commodities, Cryptos have fixed supplies. At the time of ICO, the crypto company announces the total number of tokens which remain fixed and never increased. So here commodities and cryptos both have the fixed supply. The most popular and top of the rank cryptocurrency Bitcoin cannot exceed 21 Million.
Commodities are traded through centralized exchanges and trade in the decentralized trading environment or spot trading environment where many times traded without a broker. Crypto currencies are also traded in both ways centralized and decentralized market place. There are dozens of centralized and peer-to-peer trading platforms available to trade cryptos.
We are well aware that commodities are scarce resources and used to hedge inflation. Nowadays in the similar manners trader and investors are suing crypto currencies to hedge against inflation. Until now this approach is not well established due to greater uncertainty of prices of cryptocurrencies. But the concept is there.
Commodities have a negative correlation with the return on bonds and the stock market. The trader who is trading in the stock and bonds market they use commodities to diversify their portfolios. Cryptos are also serving in the same nature it’s an addition to commodities. Correlation between stocks and cryptos are weak this is the reason cryptos sued for the diversification of portfolios. In simple words traders like commodities and cryptos because when other assets fall commodities and cryptos rise.
Well, we know that commodities poorly researched, even if these researched by the top commodity houses that research does not share with other market participants, like retail traders. Same happens with the cryptocurrencies, there are firms which keep a close eye on cryptos but never share their insights.
Not All Crypto Currencies are Commodities
We cannot classify the cryptocurrencies as real currencies because all the real global currencies are regulated and monitors.
Real currencies are government-backed securities and government interference is the key feature of a currency.
In a country, government and banks manipulate their own currencies just to maintain a favorable position in the market. The same scenario did not fit with the cryptocurrencies.
These are the reason cryptocurrencies are considered securities and classified as commodities. From the previous few years, commodity and futures brokers are offering to trade of cryptocurrencies through their online trading platforms.
This is the reason FINMA the Swiss regulator published and implemented a framework in the shape of complete guidelines on initial offering (ICO). Basically, that guidelines characterized the cryptos into three categories.
According to that guidelines, all the cryptos cannot be classified as commodities. We have to follow those guidelines as Switzerland is the leading economy with the crypto industry.
Main Drivers of Commodity Market
Every commodity is unique in its nature, characteristics, and usage, these unique factors derive price in the commodity market. Particularly in a country, there are many other certain factors which play an important role in shaping the price of the commodity, and the price fluctuates because of these factors. Most important factors are,
Emerging Market Demand
Countries which are growing with more speed like India and China accruing the massive amount of wealth with the growing economy. Their need for food and basic goods also increasing at the same pace which needs to fulfill from the same global production of commodities. Crops, live Stock and metals are in the robust demand. Demand in the emerging market always put pressure on the prices and because of higher demand, we see price is rising in the commodity market. In the opposite case when the emerging economies slowdown that depresses the prices.
This is the main factors and usually, because of its price rise or falling months ago. Because now a day forecast and data from the previous cycle is accessible to traders.
Commodities are capital-intensive products. Commodities inclined by natural factors like pest attacks, weather, size of the land cultivated in the current season. Technology and labor patterns are also part of reasons.
Rising inventories always put pressure on the price and falling inventories always favorable for higher prices. If more land cultivated this year means more inventories, and it will press the price.
US Dollar used as the world’s reserve currency any change in the value of US dollar affect the price of commodities. I always said it dictate the prices of commodities and it’s impossible to avoid the impact from the US dollar
It is simple more dollars required to buy the commodities when the value of dollar decrease against other currencies. Which means higher prices for the commodities it also creates uncertainty and brings the imbalance in the commodity market. In the other way, fewer dollars required to buy a commodity when the dollar is strong.
The traders are in commodity trading market always keep an eye on the US economic data like the weak GDP number from the united states can lead to higher prices of commodities as it can weaken the US dollar. Political and international relations with the commodity producers also matter a lot and helpful in determining the commodity prices.
US dollar globally acts as a commodity buyer’s currency can cause a headache to the traders. Weak US dollars also favorable in some conditions to the buyers when they pay less dollar to buy a commodity but not for trading houses and producers. Less costly goods are the cause for a surge in the demand and as well in the price.
If you are in a plan to trade the commodities, then stay ready to keep an eye on the US dollar.
Accounting and economic students can understand it in a much better way. Substitution principle of economics describes that when the substitute is available on the cheaper price that will create risk for investing in any commodity.
In the manufacturing industry aluminum often replace copper because of the cheaper price. While here in the commodity market farmers have a lot of choice like barley, Corn, Oats, etc.
Weather conditions cannot be controlled and are not in the hands of a human being like prolonged drought, excessive rains are the reason which can limit the crop yields.
In such a situation price rise, and many times cold weather and storms destroy the crops which becomes a major cause of the increase in prices.
Governmental regulations, (constraints & subsidies)
Import tariffs and government contributions are also among the drivers of the commodity market. Like when the government import from other counties on higher prices. They give subsidies means contribute to the price and because of the shortfall in crop yield when constraints imposed that also become a driver of this market and considered as an important factor in fixing the price.
Consumption trend of a commodity plays a vital role in the determination of prices of the commodity. Consumption trends change over time and considered seriously while determining future prices.
Advantages of Commodity Trading
There are several advantages, I List the most important ones while keeping in view the current trading activity in the commodity market.
Demographic shift on the globe and the increase in the population creating investment opportunities in the commodities.
As per the estimates of world economic forum more and more people are moving to cities which can create an enormous demand for metals to build their homes and infrastructure.
In China, Asia, and Africa people are getting richer the greatest gains in the wealth increasing demand for livestock’s, cotton and other commodities like wool to cloth them and wheat to feed them.
This shift also increasing the demand for electricity and other energy commodities. Especially in developing nations like India where people are moving from rural areas to urban cities.
Hedge Against Event Risk
Commodities provide a good hedge against the natural disaster, war and even to the economic crises. Such events can depreciate the investor’s assets and become an event risk. Traditional assets stock and bonds got a massive hit when any of above-listed event hit the market.
On the other side event risk always increase the prices of commodities which creates an opportunity for investors and traders, like during the war in the middle east increased oil prices. So, Commodities at a hedge against the event risk in this world and can protect an investor from losses.
Liquidity & Volatility
This is highly liquid market and volatility make it more attractive for short-term investor and traders. An investor can exit from the position on his wish which is not possible in real estate or some other offline business and many time in low volatile stocks. Speculators create the volatility and many time cause spikes and whipsaws.
Trading on Lower Margin
In the commodity market, it is possible to trade a contract with the fractional cost; the margin charged in good faith to make sure the trader can pay the losses. Margin in commodity trading act as collateral. Like with most of brokers margin can be from 5 to 10% that means in the cost of a full contract trader can trade five contracts.
Margin in commodity trading is much lower than compared to the margin required to trade other asset classes like stocks and bonds. This ultimately increases the potential of more profits.
Speculators and short-term investors on the online trading platforms of commodity trading market make it highly volatile. Because of quick movement and repetitive moves it becomes possible to earn more while using the same investment again and again. Future prediction because of the commodity cycle and price cycles also make it easy to predict the future price and gain from it.
Hedge Against Price Fluctuation
If you need commodities continuously, then you can trade it to hedge the risk of price fluctuation like today you can buy and three months future delivery contract which can ensure you the same price.
Lock-in Price for Your Produce
As a farmer, if you are producing a commodity then you can sell in the future market and can ensure a good price which will definitely reduce your future uncertainty of prices.
This is a great advantage of commodity trading as today a farmer can lock in the commodity’s price, the commodity which he is growing.
Many time farmers met with the endless wait of demand while selling in the future market a farmer can ensure the future demand. Selling a future commodity contract which a farmer is producing can ensure the demand on the expiry date.
Control Your Costs
If you are a large-scale consumer like an industrialist and raw material cost dictate the end price of your product. Any sudden rise can push you to raise your prices in the market and to your customers can make your products less competitive. And if you do not pass the hikes, you will suffer from loss.
While trading the commodity futures contract you can ensure the prices favorable to you and can keep them at the minimum and constant.
Ensure Continuous Supply
This is the most important advantage to the large-scale consumer as they cannot stay out of raw material. Shortage of raw material means absence from the market and they cannot suffer with such event. Trading in the futures market ensure continuous delivery of raw material.
Investing in the portfolio is a perfect hedge against inflation. When inflation hit the market traditional assets like stocks keep falling while commodity price rises. In such condition, investors consider commodities a safe haven to invest. Commodities could be more expensive if world economies bouts experience high inflation. A weak dollar can lead to inflation as well as higher commodity prices.
Inflation cause currencies to depreciate and at the same time commodities appreciate because of inflation. Inflation always erodes the real value of financial assets like bonds and stocks in such environment investors turn towards commodities.
Commodities are the best option to diversify a portfolio with the least cost, especially for the financial Asset traders. Trader wide portfolio always considers commodities to diversify their total portfolio. Commodities trading always reduce the overall risk when used to diversify a portfolio.
Commodities have a negative correlation with other major asset classes so often when stocks fall commodities rise. There is no connection between returns on stock and commodities.
Risks Associated with Commodity Trading
The current online trading platform eliminates most of the risk for traders as we cannot expect physical delivery while trading with the online broker where the contract’s expiry brings profit or loss in the shape of money. While physical trading has several risks like operational and quality of commodity along with delays in the delivery.
For the online traders who are taking the benefits of the technology, leverage is the biggest disadvantage, it can make you’re winning double and because of it, the margin call may knock at your door. When you are doing margin trading, you need to take very calculated decisions.
Origin and Evolution of the Commodity Market
In the early 1800s, agriculture commodities were brought from the Midwest farmlands to Chicago and stored there until shipped out to the east coast. The quality of these perishable items deteriorates over time due to storage. In that time the future price was created from the first contract the forward contract enables a buyer to pay for the commodity before taking physical delivery.
Chicago develops a market as more and more farmers and merchants start storage facilities in Chicago. The first US Exchange CBOT established in 1848. Brokers play a vital role in the current’s evolution of market brokers established more efficient ways and procedures to trading commodities which become part of regulations in the coming years. After the establishment of CBOT, there was a standard method to trade the commodities and transfer of payments while creating future contracts.
Instead of creating different contracts with the different quality, quantity and price for interested parties. They rationalized buying and selling of future delivery contracts by generating identical contracts with the same quantity, quantity, and same delivery terms.
This effort streamlines the whole process and for the next 100 years, the future market remains limited to the agriculture products. In 1936 CBOT added Soybeans then in 1940 Cotton and Lard was added. In 1950 livestock was added to the trading block. Precious metals were added in 1960.
In the 1970s with the end of the gold standard when currencies fluctuate with the demand and supply and financial structure become tradable. That makes it possible to trade the prices instead of goods.
This was the time when cash settlements used as an alternative to traditional delivery of the good. In the 80s and 90s stock market indexes was added in the future market as tradeable futures.
During the 20th-century futures trading exchanges opened all over the United States which makes commodities easy to trade and turn this market into an investment option.
With online trading in the 21st century, the demand for commodity trading led to the highest interest. Now because of the online trading platform buyers and sellers can place orders from the comfort of home or office. This ease of access transforms this market and led many to pursue a career in futures trading.
New steps and technology bring thousands of more participants, traders, and investors into this trading arena. It becomes a market where traders look to hedge their financial interest against losses in other financial markets. Investors poured millions of dollars which create space for third-party brokers which connect the buyers and sellers to the exchange while charging their fees and provide insights into the market.
Ways To Invest in Commodities
It depends on the trader or investor’s choice that how he wants to gain exposure in the commodity market.
The first and basic option to take exposure in the commodity trading market is to take physical delivery. When you are a consumer or deals in physical trading, then this option is best for you. Physical delivery was the only option when commodity trading started. But now electronic trading totally changed it where at the expiry date winner and loser exchange the difference of money.
In the physical deliveries handling and storage is also a problem for the non-perishable items like gold and Silver physical delivery may bother no one but when you deal in perishable items caring required to handle and store them.
When you are an investor or a speculator, you need not worry about the deliveries. At the end of your contract if you are in loss broker will charge loss from your account and if you are in profits, the money will come to your account.
This is the most direct method when you are ready to take deliveries you are investing in the actual commodities. Nowadays this method only works with certain commodities like gold people love to hold it physically. Storage and safety will be an issue with the physical delivery of gold.
Investing in an Exchange-Traded Fund
This is a common choice among investors who do not want to decide on their own and keen to risk. Obviously, it offers fewer returns but a safe way to invest in commodities.
An ETF is a fund traded on the stock exchange and can comprise many asset classes or a few ones. Some created only to invest in the commodities. There are a variety of ETF funds before picking any you must do your research that how they are running the business.
When we talk about the commodity ETFs, we mean ETFs which invest in physical commodities it faces the same risk which an individual face. The safe sides professional minds handle these funds and so they always complete their homework before getting into a trade. In most the cases handling and storage cost passed on to the investor and when the fund is not earning anything that will become a loss.
Investing in CFDs on Commodities
CFD Trading is not allowed in the USA because of regulations.
Well, if you are living outside of united states, then you can invest in commodities through a CFD broker. CFD stands for a contract of difference and it is a derivative product.
There is an agreement between a broker and participant to pay the difference between the start and finish of the contract. It offers to trade with the high leverage that means with the small amount one can trade the big contract.
CFD trading is exempted from stamp duty and this is an advantage to trade commodities with CFD broker.
Investing in a Futures Contract
This is the most common way to invest in commodities. A commodities futures contract is an agreement to buy and sell a given quantity at a certain price in the future date.
Read More about Futures Trading
If you are in buy positions, you will gain money on the appreciation of the commodity price and lose money when it depreciates and opposite happened, I case of a sell. You can trade the commodities in the both ways mean you can buy a commodity future contract and you can sell a contract through your online trading platform.
Futures are the derivative products so while trading future contracts you do not own the underlying commodity.
Buyers may use to hedge the risk associated with the price fluctuations and sellers can use the futures to lock their profits which they have already earned.
To buy a future contract trader need to put up only a fraction of the contract value. Which makes trader enable to hold and buy more contracts and excels the returns. But additional required if prediction went wrong and price moves lower.
Options on Futures
Most of investing options are derivative in commodity trading market Options on Futures is next in the list. This arrangement provides leverage to invest in commodities. Calls options and put options are the Options available in the market. The owner who creates the option have has a right but not the obligation to buy or sell a particular future contract at a specific price by the specific future date.
In case the call option the trade can exercise the right to go long and in case of put options, he may go short. The profit only becomes if future exceeds the strike price for put option future must fall below the strike price to make money.
Personally, I believe that investing in the commodities through the future is a tough choice, and this is the reason the majority of traders prefer to trade futures contracts instead of options.
This is another and most secure way to invest in the commodity market. While investing through shares gains will be limited but the risk too. In the most common way traders buy shares of the commodity producers and earn a share from their earnings.
Commodity producers always have a fixed cost they invest at once and thereafter they just need fixed monthly expenses but revenues are variable. Like when they get a bumper crop every shareholder enjoyed a lot and when there met with losses it becomes hard to offload the portfolio. Then in most cases, such shared remain in negative territory for the next six months or for a complete cycle. Careful selection can bring good results.
Majority of the trader who chooses the share of commodity producers for investing they prefer to hold those for a longer time period to get maximum gains till the harvesting..
Earn From Commodity Trading
Many people are in the view that good earning is not possible from commodity trading. The reason prices fluctuate a little in the agriculture commodities which do not offer to earn.
But if we consider the price cycle from season to season and from year to year, then we can see, Earning is possible and such cycles repeat and again. So long-term investing can be beneficial.
On the other side, volatility makes it possible to earn from the small intraday moves speculators always look for the cheap price to buy and sell on the higher prices in stock while here commodity trading is different. Commodity trading market is one of the most liquid and fast-paced markets in existence.
Billions of futures contracts and options traded in this market every year. From every corner of glob, the trader takes part in it to earn their share. Important things to consider while trading commodities, these three makes it different from stocks trading,
Commodities are the leveraged products, most liquid and volatile market to trade. Leverage is a two-way sword it can maximize your earning and it can multiply your losses. Due diligence is necessary to take any action and monitoring of trades is also essential to avoid losses.
Commodities trading market is more volatile as compared to other financial markets. In such a highly volatile environment, it’s hard to predict the future demand and supply especially when short-term and intraday traders are more active than the long-term investors.
Because of this volatility know that it can produce sudden movements and spikes which can eat your capital.
Fundamental decide the direction of the market to trade in the right way there is a need to keep an eye on the economic events. Political developments and international relations are also factoring here which can bring any surprise in the market.
Fundamental data always a key to drive price action. No one can control these factors but always keep an eye on these especially when you are using short-term trading approach.
These are also important price rejected and behave differently or even when broken a historical level it moves with speed. You stay aware of these levels always figure out these levels on your chart and observe how price react near it.
Above listed Four are real challenges one met in commodity trading. Commodity trading is not a difficult one if a trader learns to trade before getting in. Trading in the commodities market can be a profitable addition to an investment portfolio. Traders must learn to trade and understand these four elements to earn their share from this market.
How long it will take to learn the commodity trading depend on the learning efforts of a trader. A hard-working commodity trader can learn the basics and trading techniques in a couple of months but to become professional decision maker he may need years. For a new trader its Important to set deadlines and he must evaluate himself from time to time.
One Year Mark
This term is popular among commodity traders as many are in view that first year in commodity trading is most important. As you will be challenged multiple times in this time. This all year should be about how to trade. In your first year as a commodity trader you will learn how to approach the market. So, set your benchmarks for first year and follow them with true spirit.
If a trader learns to trade and choose the right trading approach that will make futures trading easy to trade. Even you need learning when you are trading futures to diversify your trading portfolio. Under listed four areas of learning can develop ability to trade in this market,
Developing the right approach starts with the education of factors that move the commodity market. Develop you understand with those factors research at your end. Make yourself able to find the trends and get hands on the fundamentals. Develop a technique to trade with the fundamental releases and events can become more profitable.
Learning of commodity trading takes the ample time. In the stocks, all the information to support the decision making is available at one place while here in the commodity trading the information is scattered.
Commodity trader needs to gather all the scattered information to support his decision and to trade in a better way. The economic and educational journal can be a good source of information for commodity trader.
You are dealing with the leveraged product a significant win may not make you but a big loss can spoil your motivation and trading account. Majority of traders attracted towards commodity trading because of extensive leverage possible in this market. Leverage is also a reason 95% of traders lose their money in this market so be aware of it. If you become victim of leverage then you will be considered among 95% and if you learn to handle it then you will earn what 95% lose.
Positions sizing is the main techniques to handle the leverage. Choose a very appropriate position size for your trading. In fact, at first your need to decide risk in each of your trade then according to that risk decide your position size. You must use the leverage in a way that makes you enable to handle the trades which move against you.
Sometimes strategy do not work as you plan and expect. If you hold your losing positions as most of new traders do then it may become a disaster for you. It can invite a margin call to you. If you stick to your trade hoping market will return to its position this will also keep you under pressure and you may miss next fine opportunities.
Focus in the maximizing your profits and limit your losses with the proper use of stop loss. Use swing high and swing low for your stop loss instead of plane area. Once the stop is set do not move that stop, stick to that because when the price hit your stop loss it will create another opportunity to rethink and make a new decision.
Do not invest all of your money on one commodity even that have charming potential. Always consider investing in multiple commodities. It will help to says secure and add overall diversification to your portfolio. Investing in a basket can provide you under listed benefits,
- Protection from hedge
- If can add diversification to your portfolio
- Can save you in times of high volatility