Commodities trading has taken place since time immemorial, and thus, it can be described as the archetype of our modern-day financial markets. Commodities, like stocks and bonds, are a class of assets, and as such, they are similarly vulnerable to the intricacies and volatilities of the marketplace. However, commodities are a unique asset class, which means they do not conform to regular market movements like other securities, such as stocks, do. In fact, commodities often tend to move in opposition to the movement of stocks, thus offering traders an opportunity to diversify their portfolios, enabling them to lower risks.
Let’s briefly explore what commodities are, the different types of commodities and how you can trade them to see a return on your investment.
What are commodities?
Commodities are naturally occurring materials that are mined or farmed and are used to make the refined goods we buy, use and wear every day. Typically, commodities are grouped under four broad categories, namely energy, agricultural, metal, livestock.
Types of commodities
Energy – Energy commodities include crude oil, natural gas and coal.
Agricultural – These are commodities that are grown for human consumption or utilised as materials for building and clothing such as wheat, cocoa, cotton and rubber.
Metals – These largely refer to materials that are mined such as copper, gold, silver and platinum.
Livestock – Livestock commodities include animals that are reared for human consumption, as well as their animal products such as leather.
Commodity trading explained
Commodity trading refers to the exchange of different physical assets, based on the price of an underlying commodity, with the aim of offsetting the risks associated with price changes of the commodity. There are a few ways to trade commodities such as through futures contracts, commodities stocks and exchange-traded funds (ETFs). Let’s explore some of the most common ways to trade commodities in a bit more detail.
Ways to trade commodities
Trading commodity futures
Futures contracts are one of the most popular ways to trade commodities. A futures contract is a legal agreement where traders agree to buy or sell a particular commodity at a predetermined price and specified time. If a trader thinks the price of a commodity will go up then they will buy certain futures, which is referred to as going long. If the trader thinks the price of the commodity will fall, they will then sell off other futures which is referred to as going short.
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This is when traders who are interested in entering the market for a particular commodity purchase stocks of a company involved with that commodity. An example of this would be if a trader is interested in the oil industry, they can then buy stocks in oil refining or drilling companies.
Commodity ETFs or exchange-traded funds are traded like stocks, where, like shares on the stock exchange, traders are able to buy and sell ETFs. This gives traders an opportunity to profit from fluctuations in commodity prices without having to directly invest in futures contracts.
The commodities market offers both the novice and experienced trader a variety of ways to gain commodities exposure. For many traders, commodities present an opportunity to diversify their portfolios beyond traditional securities, and a way to profit from ever-changing commodity prices. However, like all financial markets, commodity trading is vulnerable to some degree of risk. This risk arises because the commodities market is driven by the principles of supply and demand, where changes in supply impact the level of demand. And when the supply is low, the prices are higher.
Thus, to be successful in the commodities market, or any financial market for that matter, requires a certain level of expertise. Expertise that can only be garnered through practice. To help you sharpen your trading skills you need access to a demo commodity trading platform that allows you to trade in real-world scenarios without putting any of your money at risk. The QuickTrade and MetaTrader 5 learning portal allows you to do just that.
With the MetaTrader 5 learning platform you can practice commodity trading, learn the intricacies of the market and develop your abilities and confidence as a trader until you feel ready to enter the real market.