Commodities are essential foundations of the modern economy, considering these commodities are the main components of all the products you can expect. Among the critical commodities are crude oil, platinum, gold, coffee, wheat, and others.
There are many contracts for differences in commodities available for investment on trading platforms in the financial markets. However, before entering into commodity trading, you must learn the rules of commodity trading. Below we will learn about the types of commodities, trade them, and some crucial points related to the commodity trading sector.
What is meant by the term commodity
The commodity is a natural raw material for which some industrial processes are conducted and reproduced in new forms and then sold in the market. It is considered the fundamental base on which all local and manufactured products and foodstuffs are based. Some countries have a shortage of these resources and cannot manufacture enough of their population’s needs from these resources and their products. Therefore, they are exported to all countries to meet the demand for them.
The consumption of commodities and their production is based on several main factors such as season, climate, and resources, regardless of whether they are from the human industry or if they are natural, and the volume of demand is affected by the intertwining interaction between human consumption habits and economic factors.
For this reason, expectations of price change are very high, and in general, commodities are traded in huge quantities, whether in the money market or the exchange of long-term contracts, and they are the most widespread.
Natural resources are always used in the form of raw materials, and they are represented in four main categories of commodities, namely:
- Energy: It includes natural gas, crude oil, gasoline, and heating oil.
- Metals: These include gold, silver, copper, platinum, and other vital metals.
- Agriculture: It is extracted from the land, such as wheat, corn, rice, cotton, coffee, sugar, soybeans, and many other crops.
- Livestock and meat: which include sheep, cows, buffaloes, and others.
All types of commodities traded in the financial markets can fluctuate significantly daily due to the occurrence of some natural disasters and economic problems in some countries, and the volume of demand for some commodities in particular.
It is possible to invest in tangible commodities, but it is mostly traded via futures contracts. This gives the holder of the futures contract the ability to receive a specified amount of the commodity.
Also, futures contracts are invested through commodity exchanges and may be used to speculate on the price fluctuations of significant commodities.
Who are the groups that trade in commodities?
Generally speaking, there are four classes of investors who trade in commodities:
- Speculators: They are those who have the knowledge and a hard look at a specific commodity and are ready to take all the risks and risks involved in those operations, hoping to make a lot of money.
- Hedges: They are the traders who usually buy or sell commodities to help them bear the risk. In a stable or balanced trading basket, commodities provide a hedge against the downward fluctuations in the prices of other securities.
- Producers: Some farmers who grow and harvest some commodities may prefer to enter into a deferred agreement relating to the delivery of commodities to compensate for risks in future price fluctuations.
- Brokers: They are represented by people or companies who execute orders to buy or sell contracts for certain commodities by authorizing their clients.
The way of trading commodities
It is possible to buy platinum in real terms. Still, it will be exhausting financially, so if you expect that the platinum metal price will rise after a period, you can buy contracts for the difference on platinum, whose prices are determined through forwarding contracts on the same commodity.
This means that you should not hold the real commodity and use the leverage to trade on a massive amount of platinum and raise your profit percentage if the commodity price increases.
Commodities tend to be traded in massive quantities, but most investors would be fanciful to be able to remedy them. Alternatively, due to their variable nature, commodities are often used to speculate on their prices.
Investors trade in the commodities market, which includes several global commodity exchanges. In the commodity market, unlike the stock market, where everything ends, this is because the goods must be delivered to their true owners in the end.
Trading in commodities in long-term contracts
Long-term contracts, such as CFDs, offer some advantages that attract a lot of buyers or sellers:
- Leverage: Long-term contracts can be traded on margin, and this means that traders only have the right to put up a part of the total value to trade it in the market.
- Liquidity: Since many speculators are often willing to take risks from trading in a specific commodity, trading through long-term contracts is considered somewhat easy. However, this matter changes from one commodity to another.
- Commission expenses: The commissions for buying or selling a long-term contract are often lower than the commissions when buying or selling a major commodity.
- Sellability: You can sell long-term contracts as simple as buying them, to be able to make gains, regardless of the conditions of price movements.
- Points: In trading long-term commodity contracts, there are no points, but commodity CFDs related to long-term prices have points related to the difference between the bid price and the asking price in the contract spread.
- Spread: The price of buying a contract in exchange for what it takes when selling, or the difference in price between the bid and ask, in short, the price difference. Price differentials differ from one commodity to another, related to the specific time during the day, because trading conditions when the volume of liquidity are small often cause more enormous differences in prices. Again, the spread could rise before the reports that affect commodity prices are released.
- Expiry date: Since commodities are traded in the form of futures contracts, they always have an expiration date. This date changes according to the type of commodity, but for the monthly deal, its validity date usually ends on the third Friday of the same month before the beginning of the next month. You must check your contract history to ensure it is still valid.
And since traders have the opportunity to sell their contracts before the expiration date, the volume of most commodities decreases and fluctuates more as the expiration dates of the contracts approach.
Also, traders have a period ranging from 10 to 18 days before the first expiry date. During that period, they can buy the same commodity, but with an expiration date in time.
Commodities are natural resources from which all other products are extracted, and they include several basic types of commodities. Trading through major commodities gives you profit with a lot of money, but you must know how to trade through them, and this is what we tried to explain to you through this topic.