Commodity Trading 101

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Commodities are part of our daily lives. They may appear in different forms, but they are still present. Various economic changes can affect a person who trades commodities, such as having an increase in crude oil prices will affect not just the traders but also anyone who owns and drives a car.

Commodity Trading Concept

But commodities are not just meant to be consumed in our daily lives. Traders can also use them for portfolio diversification. You can choose to trade commodities for the long-term or just for short periods of time.

In the past, commodity trading was off the table for most traders since it takes too much time, money and experience. But in this day and age, there are various routes you can take to enter the commodity markets. Some of these routes even make it easy for the non-professional traders to participate.

Commodity Exchanges

Several commodities exchanges might have gone out of business or merged but that does not mean that there are no more platforms available for those interested. There are still numerous commodities exchanges found across the globe.

Most of these exchanges offer few different commodities and tends to offer and specialize on a single group of commodities.

Some of the most well-known exchanges in the U.S. are those run by CME Group, which was the result of a merger between the Chicago Mercantile Exchange and Chicago Board of Trade in 2006. Also, there’s the Intercontinental Exchange, while London has the London Metal Exchange which only specializes on metals.

Types of Commodities

There are now 4 categories for tradable commodities which include:

Metals – This category has gold, silver, platinum, and copper.
Livestock and Meat – These include lean hogs, pork bellies, live cattle and feeder cattle.
Energy – Commodities that fall under this category includes crude oil, heating oil, natural gas, and gasoline.
Agricultural – These are commodities like corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar.

Commodities Futures

Most people consider commodity trading as risky since it uses futures contracts as a way to invest. In futures contracts, you will strike an agreement to buy or sell in the future a specific amount of a commodity in a particular price. Every category of commodities can traded using futures.

If you’re mostly a speculator or an institutional or commercial user of the commodity, then you might be in an advantage in this field.

Most of the traders in commodities futures are manufacturers and service providers. They mostly participate in this kind of trading to avoid market volatility of commodities like crude oil and gasoline.

Futures and hedging done together can help keep businesses afloat especially those that rely on predictability to manage their expenses. Volatility in commodities can cause huge bankruptcies for those in the commodity-reliant businesses.

The speculators on the other hand are mostly made up of individuals who look to profit from any possible changes in the price of the futures contract. They usually close out their positions before the contract is due. Speculators, most of the time, don’t even take actual delivery of the commodity itself.

Advantages:
  •          Leverage allows you to make big profits
  •          You can easily take the long or short route, depending on what you prefer.
  •          Minimum-deposit accounts control full-size contracts. This makes usually unaffordable contracts be attainable.


Disadvantages:
  •          Leverage also magnifies the losses.
  •          The futures markets can be very volatile.
  •          Additionally, the futures markets might require that you first need have lots of experience to help ensure that you succeed.


Commodity trading is a good place to mark your money at when the other markets’ bearish and bullish trends prove to be too volatile at the moment. But you should also consider every movement you make before making final decisions. Do your research to know if this field is right up your alley or not.

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7 comments:

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