Are you thinking of investing in commodity trading, but you have never done it before? In this case, you need to understand what the commodity trading is and need to know five things before making your first trade.
What Is a Commodity Trader?
A commodity trader is a business or an individual that aims to invest in physical substances such as gold, oil, and agricultural products. Usually, the expected economic trends in the commodities market drive the day to day selling and buying. The commodity market focuses on the trade of primary economic sector – this includes industries focusing on the collection of natural resources for profit.
Generally, most commodity traders focus on the sale and purchase of futures contracts, although derivatives trading and physical training are also common types of trading. The most commonly traded commodities are oil and gold, but markets also have a place for cotton, wheat, sugar, coffee, corn, cattle, lumber, silver, and other metals.
5 Things You Need To Know Before Jumping into Commodity Trading
As we have learned what commodity trading is, you might think it is widely different from the other trading methods. But that’s not the case. This trading method is like the other forms of trading, and a trader who has skills and knowledge can make a great amount of profit, while others can lose money. Know how to select the broker that will best suit your trading needs.
Before starting your journey, you need to learn five things about this trading.
Table of Contents
Common Types of Commodities
There is a wide range of commodities. But all of them can be categorized into main forum categories, which are:
- Metals (gold, zinc, silver, etc.)
- Energy (electricity, natural gas, etc.)
- Agricultural (corn, coffee, wheat, etc.)
- Meat and livestock (cattle, hogs, etc.)
Some people prefer trading energy commodities, and some want to trade agriculture commodities, while others prefer other types. However, if you are trading agriculture commodities, you need to deliver, but other commodities do not need to get delivered.
Largest Trading Body
As you may know, the New York Stock Exchange and NASDAQ are bodies for trading stocks. The largest trading commodities exchange center is the Chicago Mercantile Exchange.
Moreover, the traders use online platforms for trading commodities, and around 80% of the trade takes place on these platforms. The remaining 20% of the trading comes from open outcry. This generally depends on the call out price, quantity, and orders.
Commodities Are Volatile
Commodity trading is not like traditional market trading. If you are a person who always looks for a steady and stable market price, then the commodity market is not for you. The unpredictable conditions in the commodity market are acceptable for the experienced market.
Recently, the commodity market has seen more volatility than in the past years. For example, coffee, natural gas, and other commodities have seen an increase of 30-60% cost just in the past six months. Even the entre commodity market has seen volatility more than the 30 to 60% cost within the last 15 to 20 years.
Dollars and Commodity Market Correlation
The currency values have always had great impacts on the world economy because of various reasons. However, the commodity market is a little different in this case. This market faces the impacts of the dollars and fluctuates with the dollar’s value. This is because the traders use dollars for trading commodities all around the world.
The commodity price remains low when the US dollar value is stable. But when the dollars start to decline, it means you need more dollars to purchase any type of commodity. So, one of the major factors you need to consider is the fluctuation in the dollar prices.
Investment in the Future
If you want to invest and don’t want to put yourself at risk, you have a choice to invest in the future contract. This happens when two parties make an agreement to exchange commodities at a certain price at a specific time.
However, this is not something that inexperienced traders should do, as it requires a lot of money to initiate this investment, and even people need to borrow money to invest. Most importantly, you need to have experience and knowledge about the market so that you can predict future volatility. In case you make the wrong predictions, you will have to face loss in your investment.
Commodity trading is different from the traditional trading method. However, it can give you a lot of profit than the stock market trading, but you must have the experience to deal with the market changes.