A Guide to Commodities Trading
Most people are familiar with trading stocks or forex. Recently, crypto trading has also become popular. It’s no surprise that cryptocurrencies trading has seen a marked rise since the general public’s interest and awareness in crypto continues growing.
However, most people often overlook commodities. Many people starting trading don’t even consider them as a viable option. That’s chiefly because commodities trading doesn’t have the same widespread awareness as stock and forex trading. However, if you delve into it, you’ll realize commodities trading can be an excellent way to generate sizable returns.
What are Commodities?
Commodities are an essential part of most people’s lives. Commodities refer to essential goods that people use daily. They can include agricultural goods like grains and beef. Likewise, they also include metals and energy goods.
Commodities are typically raw materials that are processed to create more complex goods. Resultantly, you’ll find that most commodities are standardized worldwide. For instance, one ton of grain produced in Brazil will be identical to the same ton of grain from Papua New Guinea.
A Brief History of Commodities Trading
People have been trading commodities for centuries. In the past, people would trade them physically. However, that’s no longer the case. Today, you’ll find commodities trading happens on exchanges worldwide. Some of the most prominent commodities trading exchanges include the London Metal Exchange, the New York Mercantile Exchange, and the Chicago Mercantile Exchange.
Characteristics of the Commodities Market
You’ll need to understand the characteristics of the commodities market to trade them successfully. The fundamental principles of market forces apply to the commodities market. Demand and supply influence the price of commodities. For instance, if a commodity has high demand relative to supply, its price will increase. Likewise, if a commodity has a higher supply relative to demand, its price will decrease. However, like other asset class markets, the commodities market is also susceptible to external and internal influences. For example, technological advances can affect the prices of commodities. Likewise, in the case of oil, OPEC can artificially impact prices by controlling the supply. When discussing agricultural commodities, similar factors apply. For instance, a global health issue affecting cattle could affect the demand for other types of livestock.
Types of Commodities
Before proceeding, you’ll want to know the different types of commodities people trade. They include:
Metals
Metals are arguably the most commonly traded commodities on the market. These generally include gold, silver, platinum, and copper. Historically, people have traded metals for centuries. People have always considered gold an excellent store of value, a perception that persists today. Many traders and investors still like to invest in gold and other metals. They believe these metals are more tolerant to market volatility. Resultantly, when markets face a downturn, many traders will turn to gold trading.
Today, gold is the third-most traded asset class in the world. Its global trading volume has exceeded $183 billion.
Gold bullions
Energy
Energy commodities refer to oil, gasoline, natural gas, etc. Energy commodities are highly popular worldwide. However, you’ll want to keep an eye out for numerous factors that can impact the energy market. For instance, economic downturns affect the prices of energy commodities. Likewise, technological advances in alternative energy can also impact the market. New technologies like solar, wind, biofuel, and more are experiencing rapid growth. Many believe these technologies will eventually replace crude oil as the primary energy source. In addition, consider how the Organization of the Petroleum Exporting Countries (OPEC) can impact energy commodities prices. OPEC can artificially lower or increase supply, causing oil prices to shift substantially.
According to the World Bank’s Commodity Markets Outlook, energy prices soared substantially in the third quarter of 2021. The World Bank forecasts energy prices to remain elevated throughout 2022.
Livestock
Livestock commodities refer to live cattle, feeder cattle, pork bellies, etc. It also includes meat like beef, chicken, and more. Traders often group the livestock commodities market with agriculture.
Cattle herd
Agriculture
Agriculture commodities refer to corn, cocoa, rice, grains, cotton, sugar, and other crops. The agricultural commodities sector grew substantially in 2021. However, the World Bank predicts it’ll decrease in 2022.
The agricultural commodities sector can be more volatile than other commodities sectors. That’s because weather causes crops to grow cyclically. In addition, numerous problems often exist. For instance, pesticide crises have been prevalent worldwide in recent years.
Rice field
Why Trade Commodities?
Naturally, after reading all of this information, you might be wondering why bother with commodities? After all, if you’re trading stocks or forex, commodities might not seem as attractive. However, trading commodities has numerous advantages. They include:
Trading Opportunities
Commodities are known for being highly volatile. Many people consider volatility to be a bad thing. However, if you’re a trader, you’ll rejoice. That’s because higher volatility creates more trading opportunities. As prices fluctuate because the market shifts, it opens opportunities for you to trade in both directions. You can capitalize on upwards and downwards price movements when trading commodities.
Leverage
You can use leverage when trading commodities. Doing so enables you to trade large sums with minimal investment. Resultantly, you can generate sizable returns. However, leverage also has drawbacks because it amplifies any losses you incur.
Portfolio Diversification
Many traders buy commodities to diversify their portfolios. Typically, commodities have low correlations with other asset classes like stocks, bonds, forex, etc. To illustrate, let’s look at gold. Gold prices typically rise during economic uncertainty. That’s because most people view gold as a safe asset. Trading commodities can help you with portfolio diversification and reduce portfolio risk.
Hedging Against Inflation
Commodities are also an excellent way to hedge against inflation. Traditional currencies lose value as inflation occurs. However, commodities don’t experience the same effect. Typically, commodities like energy and agriculture witness price increases when inflation occurs. Therefore, commodities are an excellent way to hedge against inflation.
Start Trading Commodities with Crystal Ball Markets
Are you interested in trading commodities? You’ll need an online trading platform that enables you to trade commodities without any hassle. Crystal Ball Markets is one of the best energy and agricultural trading platforms you’ll come across. Visit our website to learn more. Alternatively, register with us today to get started.