Those who do not know about commodity trading it would be a little weird to understand. People might not have thought that someone can earn profits just by speculating over the prices of essential daily life goods. Did you ever think about it? Don’t worry; you’ll be crystal clear after finishing up this fantastic post.
In this article, we would be covering a significant query, i.e. how to trade commodities? But wait, we would not be just jumping into the steps. First, we would make you understand what commodity trading is? How it works, and what are the different types of commodity trading?
Let’s begin now!!!
Understanding Commodity Trading
A commodity is just an essential good required in day-to-day lives. It could be oranges, gold, wheat, pulses, oil, metals etc. These are interchangeable assets that get transferred from one place to another. Also, these are raw (comes from earth); and further divided into two categories, i.e. soft commodities (wheat, sugar, and coffee) and hard commodities (metals and gas).
Just like the forex market trades in currencies and shares are traded in the stock market. The commodity market is an exchange where investors can speculate over the prices of different commodities. It is a digital space where anybody can buy or sell goods at a special rate.
One can do this at current and future prices. There is no need to own a commodity since the speculations are over a fixed agreed-on rate for a particular date. Different factors influence the costs of each good. Metals and agricultural products are popular trading commodities in this regard. Also, this is not a new concept. It dates back to 1530, even before the forex and stock market came into existence, in America.
How it works
The commodity market is quite easy to understand. First, you choose a commodity to start. You have to trade at the current price of the asset. You do not need to own the underlying asset. Now, if the price of the good (which you chose) moves upward, then you’ll be getting the difference. And vice versa if the price moves downwards. Let’s understand this thing with the help of an example.
Suppose you want to trade wheat, and it is trading at €10,000 today, and you paid margin money at this price. If the rate of the wheat at the end of the day goes up, let’s say €12000. Now you bought the wheat at a lower price (10000) and can sell it at a higher rate (12000), because of the fluctuations. Thus, the difference would be your gain.
Therefore it is said the factors play a significant role in this. You have to bear the losses in the same way if the price goes down. In this, you are trading at an agreed-upon price, and speculating about the price fluctuations. Now that you understand a commodity market, and how it works, it’s time to study different kinds of commodity trading which can trade. Let’s start.
Kinds of Commodity Trading
1) Agriculture Trading:
Agricultural goods are the most popular trading assets in the commodity market. They are significantly volatile, and their profit potential is one of the best in the commodities market. It is because agro-based goods are used everywhere in the world. It includes products such as corn, wheat, soybean, cotton, sugar, and coffee.
The prices of agricultural commodity trading get influenced by several environmental, legal, and political factors. Change in the taxation system, the weather condition in a particular year, agreements between international trade bodies, international customs duties, and customer’s taste are some of the factors.
For example, if the European government decides to impose import taxes on wheat, it might impact its prices in the commodity market. The agricultural commodities are so vast in number that any regulatory body, national or international, can impact its chart.
Fun Fact: Coffee is the second most traded commodity in the world, just after oil.
2) Metal Trading:
One might not need to think much about what will come in this section. Gold, silver, platinum, etc. are some of its components. You don’t need to own a commodity to trade. Instead, you can speculate over prices from anywhere, anytime. The essential factors influencing metal trading are the supply and demand of any metal.
But, changes in reserve policy, technology usage, and market conditions are also some significant factors. Metal trading is beneficial for those investors who do not want risk in their investment portfolio. It is much safer than other forms of trading because of its stability for decades.
3) Energy Trading:
It includes both renewable and non-renewable forms of energy. Crude oil, coal, natural gas, and gasoline are some of the energy commodities. There’s no comparison when it comes to their importance in the world. We all need oil; to run factories, to fly planes, to run our cars, to make tires, and many more. Even many countries like the Gulf and Russia have a significant chunk of their revenues from the oil trade.
Yes, you guessed it right! OPEC* countries meeting would affect their prices significantly. Other factors include changes in policy or rules of significant economies, taxation, trade relationships between nations, political crisis, etc.OPEC: Stands for the organization of petroleum exporting countries. It includes 14 nations that are the world’s largest oil exporters.
4) Livestock Trading:
It consists of live and feeder cattle. With the standard of living increasing day by day among the people, the demand for protein is also on the upward side. It can also be a lucrative investment as the livestock industry has a share of trillions of dollars around the world. The significant factors influencing livestock prices are demand, cattle quality, and the cost of cattle feeding food.
So, broadly these were the types of a commodity trading that traded in the commodity market. One can select any asset from them (or choose a combination) based on their preferences and requirements. But, one should also not forget about the pros and cons of every commodity. Thus, as we said, homework is mandatory.
Now, let’s just quickly move to the section for which you have come this far, i.e. how to trade commodities? Below are some astounding steps for the same. These steps are simple to understand and just require a read up.
3 Steps Guide to Trade Commodities
1) Know the market:
Knowing the commodity market is the best thing you can do to start. There are so many factors and terminologies involved in the commodities market. One needs to understand them to trade efficiently. Yes, it is purchased just like any other market but, the price fluctuations vary from market to market. So, do your homework first before getting into it.
2) Find a Broker:
After understanding the market, you need to find the person who’ll be your better half in commodity trading, a.k.a broker. The role of a broker is not just limited to making your trades, as per your demand. Instead, he should be helping you understand the market, helping you make the right financial decisions (without any personal bias), and suggesting the best courses of action.
A trustworthy and reliable broker is also needed because he will be holding your accounts and implementing your trades. Thus, safety and security are required. The broker will then perform all the paperwork and would verify all your details. It includes personal and financial information.
3)Placing the Order:
After finding a reliable broker, it’s time to start your work. Consult with him and make your first purchase. The good thing about commodity trading is there are a plethora of assets to trade. Make sure to do proper fundamental and technical analysis of the commodity you’re choosing.
The broker will make sure that your bank account has enough money to trade. You at least need to deposit 5-10% of margin money (depending on the trader) in your account before starting your trade.
How will you earn?
After you place your first order, now comes the real thing, which differentiates commodity trading from other forms of trading. Now the day you trade, the market will close, and a settlement price determined by the factors we discussed. And the difference between settlement price and price, in which you placed an order, get debited or credited in your account.
The contract is then terminated. You have the option of getting the commodity or getting paid in cash, according to the current price. Isn’t this guide short, sweet, and useful??? Now, what’s remaining in our pot? One last thing for you! One tip which might help you, when you’ll start trading. Give it a read.
Best Commodity Market Tip before Starting Trade
Make sure to read and analyze the news coming related to your commodity. And if you’re a beginner, it would be better for you to hire an adviser. Just make sure he has enough knowledge and experience to help you make sound decisions.
The Bottom Line
In the end, we would say that there is commodity trading for everyone in the market. Whether you’re a beginner or experienced day trader or long term investor; there would be something for you. We would suggest you reread this article for better understanding because a single-point miss might become costly. If you want to play safe with the commodities, then metals trading would be a good option. However, if you are craving for profits, then shift towards agricultural products. Remember, your portfolio might get risky as prices get affected by anything like disasters, weather, politics, etc.