In the age where cryptocurrencies rule, commodity trading doesn’t appear to be attractive, does it? However, if you are a young trader looking to make reasonable returns, you shouldn’t rule out commodities. It is an increasingly popular investment option which has been made much easier and user-friendly by online brokers.
When you can trade commodities like oil and gas sitting in the comfort of your home, it doesn’t appear to be that bad of a proposition after all. Most traded commodities are oil and gold. Currently, there are around 50 major commodity markets globally that enable trade in about 100 commodities. One of them alpari.
What is commodity?
The commodity is a physical good which has a fluctuating economic value determined by the market forces of demand and supply. Commodities can be categorised into four broad categories:
- Energy commodities like oil and gas
- Agricultural commodities like cotton, sugar, corn and wheat
- Valuable metals like platinum, gold and silver
- Livestock like feeder cattle
The best thing about commodities is that the majority of them are goods that people will always need. It means that they’ve intrinsic value. Unlike the stock market and cryptocurrency trading, commodity trading is also relatively stable and less prone to market volatility.
Commodity markets usually conduct trading business in vital economic sectors such as industries related to the natural resource collection. There is a number of online resources that allow you to keep an eye on the commodities’ prices and related details.
Most of the commodities trading is done through exchanges all around the world. They offer a wide range of commodities you can invest in, although there are specialised exchanges where you can invest in a particular category or product. For example, there is the London Metal Exchange which is self-explanatory.
One of the biggest commodity exchanges is the New York Mercantile Exchange. There was a time when large businesses and savvy investors invested in the commodities market but now the Internet has made it easier and cheaper for regular people to invest in commodities. The market has become more accessible and the consumers are relatively educated.
Commodity trading usually requires standard agreements so traders don’t have the need to inspect the goods every time they make an investment. You don’t want to buy a certain quantity of oil only to find out that it’s not of the quality you expect.
Types of Contracts in Commodity Market
- Spot Contract – It is an agreement where payment and delivery are instantaneous or happen within a short time.
- Forward Contract – An agreement where exchange of a given quantity of a commodity happens at a specified future date for an agreed upon price settled in the contract.
- Futures Contract – It is a standardised agreement which are traded through an exchange. For every commodity, there is a predetermined quantity and parties only have to agree on the price.
- Exchange Traded Commodities (ETCs) – These are like company stocks and traded on a stock exchange but the price is determined based on the commodity or a commodity index.
- Contract for Difference (CFD) – It is another derivative instrument which reflects the price fluctuation of the commodity specified in the contract.
As you can see there are a variety of ways to invest in commodities, the most popular being future contracts. For people who are only just entering the commodities trading market, online trading is a much safer and convenient way as all the information and guidance you require is available on the website. Trading commodities is also easier because you can conduct the market analysis through online resources.
As mentioned earlier, there is a multitude of online resources where you can monitor the prices of different commodities. It’s recommended that you make yourself familiar with the units that different commodities are priced for.
Precious Metals – These are normally priced per ounce. Gold is currently trading at around $1,500 per ounce while silver will only cost you $17-$18 per ounce.
Energy – Gallon and barrel are common units of trading for liquid petroleum commodities while natural gas is measured in MMBtu. For example, Brent Oil can be bought at around $60 per barrel.
Agricultural Goods – These are traded in different units including pounds, bushel and ton.
Before you go into the trading business, it is better to familiarise yourself with the units and how pricing fluctuates. More importantly, you need to keep an eye on the news that directly or indirectly affects the supply and demand of these commodities.
There are a number of online resources you can follow which publish the news and predict the price behaviour of different commodities. You don’t have to believe everything blindly but you can learn and use certain insights for guidance. This will help you ease into commodity trading.