Our Group: CIMA FSA
Education

Commodities Trading, A Market Overview Before Investing


June 3, 2020
Commodities Trading, A Market Overview Before Investing

Commodities are, in general, physical and natural products that people consume. These products include things like orange juice, and coffee, or those that agriculture or mining industries use, like crude oil or wheat.

Some products have an intrinsic value depending on their scarcity and are difficult to extract or mine, especially metals such as silver, gold, and platinum.

Commodity prices are subtle to movements in the US dollar value, and several factors influence it. Some of these factors are:

  • Variations in supply and demand
  • Natural disasters
  • Poor crops
  • Miners’ strikes
  • Wars and conflicts.
  • Tariff and trade regulations
  • Major economic events

 What is the Commodities Trading?

Commodities trading refers to buying and selling raw materials or moving these commodities from extraction or production to the place of use.

The goods value chain is complex and lengthy and involves various actors around the world. Merchants act as the organizers of this chain: shipping products efficiently towards where they are in greatest demand, ensuring the finest results for producers and consumers.

Commodities trading is a different industry. The business houses might be small local set-ups of some people or large multinationals with tens of thousands of workers worldwide.

There exist two types of products: hard and soft. Soft commodities are usually agricultural products such as sugar or wheat. On the other hand, hard raw materials are energies or metals like gas and silver, respectively.

Commodities traders sell products as diverse as coffee, cocoa, grains, oil, sugar, precious metals, and natural gas. This industry also includes many corporations that offer correlated services: inspection and certification, shipping and logistics, insurance, and corporate finance.

A trader’s margin is generally quite small compared to other companies or industries, typically between 0.5 and 3%. Therefore, they are comparable but not equivalent to the retailer. Meaning that the sizes transacted have to be very high, and the absolute sales figures are a straight function of the amount.

However, this margin is the merchant’s reward for the added value of transforming products into time, space, and form.

Product consumption and production depend on various factors, including:

  • Demand and supply
  • Weather
  • The US dollar (US currency prices the commodities)
  • Political and Economic events

 Types of Commodities

learn about trading oil

There are diverse types of products you can start trading in. The various commodities include:

 1. Metals

In the raw material trade, metals are of dual types: base and precious. A precious metal is a gleaming metal valued for its scarcity and great economic value. The main examples are silver, gold, and platinum. A precious metal is a “safe haven” asset due to its ability to hold value in periods of uncertainty and market turbulence. When there is fear, investors capitalize their money in silver and gold.

On the other hand, a base metal tends to rust relatively easily, making it more valuable in industrial and commercial applications. Base metals are numerous compared to the other category and therefore cheaper. The most popular base metals are copper, aluminium, nickel, and lead.

 2. Energy Commodities

Energy products include heating fuel, crude oil, gasoline, and natural gas. Universal economic growths and reduced oil production from established oil sources have historically led to a higher oil price. As the need for energy-related goods has increased simultaneously, the supply of Petroleum has gone down.

Investors interested in venturing the raw materials market in this sector must also be conscious of how economic recesses, any changes in production imposed by the OPEC (Organization of Petroleum Exporting Countries) and new technological improvements.

These advancements occur in substitute energy sources (solar energy, wind energy, biofuels, etc.). These sources have a goal to take crude oil’s position as the primary energy source. They may all have a significant effect on market values for basic products in this sector.

 3. Livestock Products

Another prevalent financial instrument is meat and livestock. Livestock (animals kept in an agricultural setting for commercial use) are common investments. Their increasing demand and their role in many business processes, from clothing to food contribute to their popularity.

Take cattle, for example; it is valued for leather, providing milk, meat and even labour, making it a worthwhile investment.

 4. Agricultural Commodities

Agriculture is a large global sector that feeds many individuals. Agricultural products such as corn, soybeans, wheat, cotton, cocoa, coffee, and sugar are available in the futures market, exposing investors in different economies.

Factors influencing agricultural supply – population growth, overconsumption, drought, extreme weather, and other influences – have a significant effect on prices.

 How and where are Commodities Traded?

pivot point calculator

You do commodities trading on various exchanges that specialize in certain markets, including:

  • London Metal Exchange – deals with non-precious metals
  • LIFFE – markets agricultural products
  • Chicago Mercantile Exchange – trades metals and energy
  • ICE Futures Exchange – buys and sells energy products
  • ICE Futures United States – deals with agricultural products
  • Chicago Board of Trade – markets agricultural products

Commodities are generally also transacted like futures contracts. These are agreements to buy and sell an asset at a price agreed upon on a future date. This allows you to exchange the contracts without having to possess the underlying assets.

 How to Trade Commodities the Right Way

Commodities trading is a thrilling field where you earn and lose fortunes. To be successful in this, you require knowledge. Learn about the trade itself and about the individual products you are trading. Investors have numerous ways of gaining exposure to raw material prices. Below are some of the trading strategies you can use:

 1. Learn to Use Futures to Trade Commodities

A futures contract is one way you can use when investing in commodities trading. Futures contracts refer to legal agreements to sell or buy a particular base asset at a fixed price at some point.

The purchaser of futures contracts assumes the obligation to purchase and get the underlying assets when deals end.

The broker of the futures contracts assumes the obligation to deliver and provide the underlying raw material on the contract termination date.

Futures contracts are available for all product categories. In general, there are two kinds of investors that take part in commodities futures markets: institutional or commercial users of speculative and commodities investors.

 2. Use Stocks for Commodities Trading

Most investors interested in venturing the market for a specific product will somehow invest in shares of affiliated companies. Stakeholders involved in the crude oil sector may, for example, invest in refineries, oil companies, diversified oil corporations, or oil tankers companies.

For those attracted to the gold industry, there are various options which include buying shares of mining companies, refineries, smelters, or a gold distributor.

In general, stocks are less susceptible to volatile price movements than futures contracts. Shares are more comfortable to purchase, hold, track, and trade.

Furthermore, it is possible to return the investments to a specific sector. Investors should do a little research to make sure that a particular company is a good investment and a good trading game.

Investors may also buy stock options. Like options in futures contracts, stock options require less investment than purchasing stocks directly. While the risk of capitalizing in stock option could be limited to the price of the option, movement in the charges of a product might not directly reflect the shift in the share costs of a company with an associated investment.

A benefit of investing in shares to enter the commodities trading markets is that exchange is more straightforward since most investors have a trading account already. Public information regarding a company’s financial situation is easily accessible to investors, and stocks are regularly very liquid.

Investing in stocks has some drawbacks for gaining access to the product market. Stocks are not a real game on commodities prices. Also, the cost of a stock can be influenced by business-related aspects. These factors have no connection with the value of the related products that the stockholder is trying to trail.

 3. Invest in Commodities using ETFs and Notes

ETFs (Exchange-traded funds) and ETNs (exchange-traded notes) are an additional option for financiers interested in venturing the raw materials market. ETNs and ETFs are listed as stocks. They permit investors to potentially take advantage of fluctuations in raw material prices without capitalizing in futures contracts directly.

Product ETFs often track the value of a particular raw material – or group of goods that make up an index – through futures contracts. At times, investors support the ETF with the real stored product. ETNs are unsafe debt safeties designed to imitate the price volatility for a specific product or raw material index. ETNs are compatible with publishers.

ETNs and ETFs allow investors to take part in the charge movements of a product or basket of goods, but generally do not need a special trading account. Additionally, there are no administration or purchase costs with ETNs and ETFs because they categorize them like stocks. However, not all products are ETN or ETF linked.

 4. Mutual and Index Funds to Invest in Commodities

Although you can’t use mutual funds to capitalize straight in commodities, you can invest mutual funds in stocks of corporations involved in commodity-related trades like agriculture, energy, or mining. Similar to the stocks, mutual fund stocks can be affected by many factors except fluctuating product prices. However, some factors like general fluctuations in stock markets and organization-specific factors may affect it.

However, a small number of product index mutual funds invest in commodity-linked futures and derivatives contracts. This gives the investors more direct coverage to commodities prices.

By capitalizing in mutual funds, stockholders benefit from professional cash management, liquidity, and greater diversification. Unfortunately, administration costs are sometimes high, and some funds may incur a sales charge.

 5. Commodity Pools and Managed Futures for Commodities Trading

A CPO (Commodity-pool Operator) refers to an individual (or limited partnership) who collects funds from stockholders. He then combines it into a group to invest that cash in options and futures contracts. CPOs distribute both periodic reports and annual monetary reports. They as well keep thorough records of all the investors, transactions, and other additional groups they might be operating.

CPOs generally hire a CTA (Commodities Trading Advisor) to guide them on the group’s business decisions. CTAs should be listed with the CFTC (Commodity-Futures Trading Commission) and generally must have background checks before they can offer investment advice.

Investors can choose to take part in a CPO since they have the additional advantage of getting professional guidance from a CTA. A grouped structure also offers more cash and more openings for the director to invest. In case the investors decide on a closed fund, every shareholder must contribute an equal amount.

Commodities Trading with EverFX

commodities trading

Outlined below is a guide on how you can trade commodities with EverFX:

  • Select your market – Pick the commodities market, like Brent Crude Oil, Natural Gas, Gold, or agricultural product where you need to spread the stake or trade CFDs.
  • Decide to sell or buy: Purchase (go long) where you think rates will go up, or vend (go short) where you feel costs will drop.
  • Enter an exchange size: Determine how much you will spend per point measure (spread your stake) or the number of CFD units you need to exchange. When exchanging CFDs, the worth of a unit may vary contingent to the instrument you have chosen.
  • Monitor your risks: Choose from multiple stop-loss orders, as well as GSLOs (guaranteed stop-loss orders). The standard stop-loss orders function the same way as GSLOs, except for, they guarantee you a premium that will close you at the amount you specify, regardless of volatility or gap in the market. In case the GSLO is not activated, you receive a refund of your premium costs.
  • Manage your position: As soon as you place a trade, check your vulnerable positions (including stop orders or profit orders) to track your loss or profit in real-time. Bear in mind that losses might exceed your bonds.
  • Close your trade: In case your trade does not close automatically due to a stop order or capitalized gain, close your position when you finish.

 Why Choose EverFX to Trade Commodities?

EverFX is a fully regulated and reliable CFD broker on Metals, Forex, Commodities, Crypto and more. It undertakes to offer exceptional commercial conditions. From the full range of trading tools and the cutting-edge platform to the perfect customer service and general market information, EverFX is the ultimate trading setting for both novices and expert traders.

 In a Nutshell

Both experienced, and novice traders have several options for investing in economic instruments that provide them with access to product markets. While product futures contracts give the most direct method of participating in price fluctuations in the business, there are other forms of investments with reduced risk that also offer adequate opportunities for exposure to commodities trading.

In the most elementary sense, products are known as risky investment proposals because they may be influenced by insecurities that are challenging, if not unbearable, to forecast, such as epidemics, irregular weather patterns, and natural and artificial disasters.


Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.

Categories: Education

WE ACCEPT
visa mastercard paypal transfer skrill sofort giropay trustly

Open your EverFX account

It takes a few minutes and even fewer clicks to enter the promising and exciting world of trading. Take the first step by clicking the link below.
Trading involves significant risk of loss