Commodity trading is a popular way to take a potential profit in the financial market. The commodity sector includes buying and selling different kinds of products. The traded products are either mined, grown, or produced. In the commodity market raw materials, metals, textile raw materials, food products are traded. The brokerage companies offer to start trading commodities on their platforms.
Commodities are divided on several groups
Energy commodities include:
- diesel fuel;
- fuel oil;
Agricultural commodities include:
- arabica coffee;
- white sugar;
- raw sugar;
Textile commodities include:
- natural and artificial silk;
- washed wool;
Commodity market: discourse of the market formation
Exchange commodity trading is widespread in all regions of the world. Commodity exchanges operate in the USA, UK, Europe, China, Russia, Canada, Brazil, and other countries.
The evolution of commodity exchange trading initially occurred from the necessity of organization clear price setting in commodity markets and insuring performed operations. The following speculative investors’ participation led to the volume growth of transactions in the commodity markets. It has opened up new opportunities for investment and starts trading commodities.
Gradually, the link between the physical goods market and the derivatives exchange market had been built. The trading participant coped to hedge transactions when price risks came during trading a physical commodity. Exchange trade in sugar and grain, oil and oil products, gas, chemical products, wood materials, precious metals started developing.
The exchange commodity trading is a follow-up toward to the physical market of the goods itself. The specific character of production, consumption, and trade of a certain product determine the specifics of the exchange market for a product and its pricing. These factors are called fundamental and affect the dynamics of trends in the long and medium-term. Short-term price changes are driven by news, political events, and currency rate leaping.
How does commodity trading work?
Futures is a contract to buy or sell an asset at a pre-agreed price at a specified date in the future. The commodity exchange not commodities are traded, but futures for these commodities. Every futures contract on the commodity exchange is both purchases for one party and a sale for the other.
The commodity products can be traded with the aid of the purchase and sale of companies' shares that are engaged in the extraction of raw materials. As a result, oil can be bought through shares of an oil refinery company. Grain can be traded by buying shares of a large agricultural enterprise, and so on.
When deciding to invest in commodities, traders should take into consideration the specifics of its acquisition and ownership. For instance, whether it can be purchased in vast numbers or not. Raw oil takes place as one of the top-selling commodities. It produces heating oil and unleaded gasoline, which are also classified as separate commodities.
How to trade commodities?
The concept of how to trade commodities is understandable. If prices go up, you find a seller of the commodity you want to deal with at a bargain price and capitalize on the resale margin.
Essentially, a trader work with contracts for the future delivery of a commodity on the market. The trader pays a fixed price. If the price grows from the moment of acquisition of the contract, then after the expiration of the contract, the trader can receive a profit. If the price falls, the trader cannot get profit, because of losing it.
Commodities: main features and kinds pf commodities
Commodity markets are highly dependent on natural and geographical factors. Investments in commodity assets require the appliance of technical and fundamental analysis, and attentive keeping up the news, that can affect the price of commodities. About a hundred commodities are traded on world commodity exchanges. A distinctive feature of traded products is high consumer quality, interchangeability, long-term keeping, relatively low-cost transportation. The commodity market has different kinds of traded products.
Energy commodities market
Trade energy products require the determination of a quota for the minimum volume of transactions. This will make it possible to determine the strategic line of interaction with the dominant companies in the oil trading market.
Seasonal increases in refined commodities prices do not significantly affect the overall volume of transactions. Long-term futures forecasts and in-depth analysis of the political priorities of countries, producers of crude products have a much greater influence.
Energy commodities are traded in several ways, that is long-term deals and short-term deals:
- buying and selling energy crude commodities at a higher price (long position);
- selling at a high price and then buying at a lower price (short position).
It is popular to use different methods of a fundamental, wave, and technical analysis to raise the chances of success and ability to make a profit.
Trading agricultural crude products began thousands of years ago. It is the oldest financial instrument on the market. Here prices depend on weather conditions, supply and demand, and a lot of other factors, that create many opportunities for traders to take advantage of.
The commodity market presents a large selection of agricultural products, that traders can buy and sell. This list includes wheat, corn, oats, rye, rice, refined sugar, coffee, cocoa beans, potatoes. You can carry out transactions on the future delivery of these products on the online exchanges. Many brokers provide tools for performing such transactions.
Textile materials are considered one of the most widespread and affordable raw materials to trade on the commodity market. When textile commodities are traded, the exchange s a general matter indicates several details about the product:
- producing country;
- quality (class or grade);
- the minimum available volume for a deal.
The settlement of transactions makes the trader follow the standard indicators that point out an enhance or decline in prices. The most commonly used tools are classic indicators that will help you enter the market on time. Besides, an economic calendar permits to stay tuned to the news of the world market and try to predict the time to get profits.
Precious metals are strategic crude materials. The growth in industrial production is related to an increase in demand for industrial metals. This drives the rise in quotes and creates opportunities for profit.
This commodity type has several ways to be invested: coins or bars. This way, the asset is bought physically, at the current market price. The precious metals market provides a unique opportunity to trade this asset using different forms of the metals, which allows diversifying the trading portfolio.
What forms the price of commodity assets?
Scientific and technological progress has a huge impact on the involvement of natural resources in the production of goods and services. Scientific and technological progress contributes to the rationalization of the use of natural resources, opens cheaper and more easily transported materials (for example, natural gas), methods of more complete extraction and processing of oil are introduced, raw materials are used more fully, and non-waste technologies are applied.
In the agriculture segment of the commodity market, methods of more intensive farming and animal husbandry are being introduced. In industrial production, the transition to energy-saving and material-saving technologies is being successfully carried out, which reduces the specific consumption of crude materials and fuel.
A special place in commodity trading is occupied by intra-corporate trade between parent and subsidiary companies of mining TNCs. It is being conducted at reduced transfer prices, which creates an opportunity for a tax-free transfer of profits obtained from the development of foreign sources of raw materials using local cheap labor. Intercorporate trade accounts for about 30% of world raw material exports, according to information that the economic-definition.com site presents.
According to Marxists.org, there are other crucial factors, which can influence the price of commodity products:
- Demand and supply of commodity;
- Competition (the more manufacturers, the lower the price);
- Method of selling commodities.
Commodities are traded in many world exchanges, such as:
- NYSE - the largest stock exchange in the world and at the same time a symbol of US financial power.
- NASDAQ is also one of the most sought-after exchanges in the world. It specializes mainly in the trading of shares of Hi-Tech enterprises.
- The Russian Stock Exchange where transactions are performed on exchange traded funds, options, futures, currencies, stocks, precious metals and other financial instruments.
- London Stock Exchange whose popularity among traders is due to its special legislative protection.
To know how commodities are traded and start productive work, you need to know many exchange concepts: trading, initial capital, risk management, hedging, futures trading, CFD trading, ETF, technical and fundamental analysis, stop-loss, leverage, spreads, and so on
Choosing a broker is one of the most important steps. It provides you a platform, on which you start trading commodities. On the broker’s platform, you open an account and begin opening transactions for buying or selling a certain commodity.
Investors choose commodity assets as the way of trading portfolio diversification apart from conventional financial instruments. Because of commodities tendency to move the other way round the direction of stocks, some investors prefer to trade commodities during market volatility times. In the commodity market you can choose among great variety of commodity products, there are always assets to buy and sell, getting a potential income.
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What are the most traded commodities in the world?
A list of most traded commodities can be made up based on the number of contracts traded on the major futures and options exchanges. The most traded commodities list includes:
- Brent Crude;
- West Texas Intermediate (WTI) Crude;
- Iron Ore;
Should I invest in commodities with cfds?
A CFD (or Contract for Difference) allows a trader to re-sell an asset when the market rises or falls without owning the product itself. This instrument is very popular among present traders. It does not mean that CFDs trading is an easy way to trade and earn, but it definitely has many advantages. But more advantages you get trading CFDs on Investlite site, because we give advanced platforms, educational content and account managers.