Commodities Trading

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Commodities trading is another way to make money online from home, “ForexSQ” experts conducted this article for beginners want to know what is commodity trading and how to trade commodities online from home.

Commodity Trading for Dummies 

There are numerous financial assets that can be traded in international markets to increase investment income that include stocks, bonds, binary options trading, CFD Trading, foreign currencies (forex), commodities, ETFs trading, Indices trading, Equity trading and many more.  

Buying shares of stock allows traders to acquire an ownership interest in a particular publicly traded company and profits are realized when shares are sold at higher prices than the price at which they were purchased.  The upward mobility of a company in its particular niche or sector of the economy causes stock share prices to increase and those values decrease when the company’s performance wanes.     

Traders who invest in bonds are essentially loaning money to a corporation, government, municipality or other “issuer” in return for which the investor is given an IOU in the form of a bond that promises to pay a certain rate of interest over the life of the bond in addition to repaying the face value of the bond upon its maturity. 

Forex is the most traded market in the world and allows investors to make money in a number of ways that include trading one or more foreign currencies for another or predicting fluctuations in values of various foreign currencies. To trade forex currencies you need to open account with Fx brokers.   

What are Commodities? 

Commodities are natural resources that are processed and sold around the world to meet demand of all countries, including those that are not capable of actually producing every commodity needed for their societies.   

Consumption and production of various commodities depends on a variety of factors (natural and man made) and include supply and demand, global economic and political events, consumer habits, climates, seasons and fluctuations in the value of the U.S. Dollar (since commodities are usually priced in U.S. currency).  Because so many factors come into play, commodity prices tend to fluctuate a lot. 

Commodities are tangible forms of goods that are categorized as either “soft” or “hard.” Soft commodities are typically products that are bred or grown on the earth rather than extracted from it and include corn, rice, sugar, cattle and other items that are susceptible to spoilage which greatly affects prices for soft commodities, along with natural growing seasons that create seasonal price fluctuations.  

Hard commodities are generally natural resources extracted from the earth, many of which can be industrially processed into some other product and include oil, natural gas, silver, gold, cotton and more.  Cotton is considered a hard commodity because it is not susceptible to spoilage and is considered a sort of industrial material rather than an edible product.  

Types of Commodities 

To further break down types of commodities, there are four main categories of tradable commodities, which are Meat and Livestock, Agricultural, Metals and Energy products. 

  • Meat and Livestock are prosperous industries because of an international appetite for meat products, especially pork since hogs are the most commonly traded commodity in this category.  

  • Agricultural commodities include all food items like grains, beans, sugar, corn, wheat and other edible products. 

  • Metals include precious metals like gold and silver as well as regular metals like aluminum and copper.  A lot of investors choose to invest in precious metals (especially gold) because precious metals are resources that have a proven degree of stability not offered by most tradable financial assets.

  • Energy commodities include different forms of natural gas, oil and petroleum products and many investment portfolios include some kind of energy commodity.

What is Commodity Trading?  

Because it’s becoming a popular investment activity, a lot of people would like to know how to trade commodities.  Investors who trade commodities are trading some of the world’s most popularly used natural resources which are traded in the international investment arena the same way as other tradable products.  Profits are realized by selling commodities at a higher price than they were bought or buying commodities back for an amount that is less than the figure at which they originally sold.  A variety of financial instruments are used to trade commodities, including futures contracts and options. 

Commodity Trading Basics 

Commodities are usually traded in large quantities on the cash market or on futures exchanges.  

Investors can also make money by spread betting on commodities or entering into Contracts for Difference (CFDs) that involve trading on the underlying commodity’s value fluctuation rather than the commodity itself.   

Emerging commodities include products that a number of investors think will boom in the near future but which are not currently available to trade as commodity futures. The only way investors can trade emerging commodities is by purchasing shares of stock in a company that operates in a particular field or niche of the economy related to a particular emerging commodity. 

Commodity investing can be extremely volatile but a wise investor’s diverse investment portfolio would include at least a small number of commodities to offset risks associated with trading cash, stocks, bonds and other investments.  Prudent investors would wisely own stock in a company that produces or processes a commodity, as well as owning the underlying tangible commodity itself

What are Commodity Derivatives? 

A derivative is a financial instrument such as a future, warrant or option and is not a tangible product for trading. Instead a derivative is a financial instrument whose value is based upon and determined by the value of an underlying asset.  Farmers have used derivative trading for many centuries as a means of price risk management, since the value of agricultural products frequently change and are affected by many uncontrollable external factors like supply and demand, seasons and global economic events.

Commodities Futures Trading  

Commodities Future contracts are agreements between parties to purchase or sell a certain predefined amount of some commodity at a specific price and on a specific future date.  Investors choose to invest in commodities futures to avoid multiple risks associated with typical price variations in the underlying raw material or other commodity (as described above using farmers as an example).

What are Commodity Stocks? 

As previously mentioned, purchasing shares of stock in a publicly traded company gives the stockholder an ownership interest in that particular company.  Commodity stocks are simply shares of stock in a company whose focus or niche includes production or processing of some product that is considered a commodity.  Examples of companies offering commodity stocks are mining companies (Newmont Mining Corporation), gas companies (Shell or Tesoro), precious metals companies (Barrick Gold Corporation) and more.

Commodities Trading Platforms 

Different brokerage firms offer different trading platforms for clients to use in accessing their trading accounts, financial markets and tools for researching, placing and tracking trades in a variety of marketplaces.  Most brokerage firms also offer Demo Accounts for use in practice trading using virtual money and marketplaces.  

Multiple brokerages offer commodities trading platforms and varying versions of basically the same investment products and financial services, all of which can be easily and thoroughly researched and compared on the internet.  

Commodity Futures Trading Commission (CFTC) 

The CFTC was created as an independent government agency in 1974 and its predecessors in the Department of Agriculture date back to the early 1900s.  The CFTC aims to end abusive trading practices on derivatives and other financial assets that are subject to the Commodity Exchange Act (CEA) from which the CFTC derives its authority. 

Markets regulated by the CEA have grown to include contracts on financial products (interest rates, stock indices, forex) and contracts on energy and metal commodities (oil, natural gas, gold and silver). 

The purpose of the CFTC is to foster transparent and competitive trading in financially sound marketplaces and to protect traders and their funds from manipulation, abuse and fraud as defined by the CEA.   

The CFTC accomplishes its mission by overseeing designated markets, execution facilities, data repositories, swap dealers, futures commission merchants and other intermediaries involved with commodities trading.

What is a Commodities Exchange? 

Just as shares of company stock are traded on various stock exchanges, a commodities exchange is the arena in which commodities and derivative products are publicly traded. 

Commodity exchanges usually trade futures contracts on various commodities or products that will not be harvested or produced for several months and guarantees the price of that product when it is delivered.  For example a farmer can sell a futures contract on corn and the price paid by the buyer upon delivery of that product will not rise; likewise a futures contract ensures that the farmer’s selling price for corn does not drop. 

There are multiple commodity exchanges that include the London Metal Exchange (non-precious metals), Chicago Mercantile Exchange (energy and metals), LIFFE, Chicago Board of Trade and ICE Futures US (agricultural) and many more, all of which can be found on the Internet

Commodity Trading Training 

There are multiple companies that offer training in commodities trading and they can be reviewed and compared on the Internet.  Training and educational materials vary from firm to firm but include video tutorials, coursework and a variety of training academies.

Commodity Trading Companies and Brokers 

Commodity trading companies and brokers are organizations that speculate about future price fluctuations in various commodities or that trade a diverse range of commodities using futures contracts, options and other financial instruments typically used to trade commodities on commodity exchanges.

Commodity Trader 

Unlike other investment assets, commodities have expiration dates or eventual delivery dates of those commodities.  There are several types of investors who engage in trading commodities and they are hedgersspeculators, producers and top brokerages. 

Hedgers are typically large corporations that rely on consistent pricing for basic products or materials.  An investor can enter into a contract that aims to hedge exposure to losses created by price fluctuations and by doing so would be guaranteed (by the contract) a certain price for that commodity, regardless of current prices. 

Speculators are investors who don’t actually purchase commodity products but who purchase contracts for commodity products to be sold at a later date.  Major commodities are sold in large quantities and most traders would be unable to manage all of them so commodities are frequently used to speculate on future prices of those major commodities.  These investors are able to speculate as to future commodity prices and sell at whatever point they think commodity prices are heading downward. 

Producers are the people who physically grow, harvest, mine or otherwise produce various commodities and many choose to enter into futures contracts on those commodities to offset the risk of future negative price movements. 

Brokers are licensed professional traders who follow orders to buy or sell certain commodities or contracts on commodities and do so on behalf of clients who place those orders.   

Conclusion 

Commodities trading is not appropriate for every level of financial investor.  This type of investment is extremely volatile because of multiple uncontrollable factors that affect prices of various commodities.   

Commodity prices are heavily influenced by economic stability and investors who trade commodities need to pay attention to factors that affect their prices like supply and demand, global, national and local news and economic events. 

Another important factor to consider is the intermingling of relationships between investment assets.  A rise in supply and demand for one product may have an impact on the value of another product (like surging demand for cars or great reduction in the use of cars will affect the price of oil).  

Commodity trading usually involves high liquidity, leveraged trading with low broker commissions and costs.  Investors can realize profits no matter which direction the commodity price is heading because they can buy futures contracts just as easily as they can sell them.  

Today’s investors would be wise to include at least a couple commodities in their investment portfolios, but should be prepared to spend a lot of time following factors that greatly influence commodity prices and other financial assets affected by them. The ForexSQ team has also compiled articles about how to make money online by Indices trading and Equity trading.

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