What are the
Different Types of
Commodities are often separated into two typed, namely hard commodities and soft commodities. Hard commodities are raw materials that are mined or extracted and appear as natural resources. Soft commodities are agricultural products or livestock.
In trading, a wide range of commodities are categorises into metals, energy, livestock, meat and agricultural products.
This category includes gold, silver, platinum, palladium, copper, and other metals. The most popular traded among these are gold and silver. In fact, these metals are so widely traded that they are often clubbed together in a separate category of precious metals despite essentially being commodities. Trading metals is largely done by investors to hedge against high inflation levels or currency devaluation. Since these metals have real, conveyable value and high liquidity, they are extremely popular among traders. As a result, metals are considered safe-haven instruments that tend to thrive during high levels of volatility and market fluctuations.
Livestock and Meat
This category of commodities includes live cattle, feeder cattle, pork bellies and lean hogs. This is, however, not a very popular category among regular retail traders.
This category includes crude oil, natural gas, heating oil and gasoline. Growing demand for energy related products and the limited supply (and complexities in production) of these items impacts their price and contributes to high trading volumes. The market for oil and other energy products is impacted by production levels, and the development of alternative energy resources like wind and solar power and biofuels.
Items such as corn, soybean, wheat, rice, cocoa, coffee, cotton, and sugar are highly traded and their prices vary based on several factors like seasonal availability, weather conditions, production levels and exports.
Commodities can be traded in spot markets, exchanges or via futures markets. Most commodities are traded on commodity exchanges like the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange, the Chicago Board of Options Exchange (CBOE), the Minneapolis Grain Exchange and the Chicago Board of Trade. Indirect exposure to these commodity markets is possible through investments in the stocks of companies engaged in their production, exchange traded funds (ETFs) and mutual funds.
Another popular method of investing in commodities is through a futures contract, which is a legal agreement to buy or sell a commodity at a predetermined price at a specific time in the future. In this case, the buyer of a futures contract agrees to buy and take possession of the underlying commodity when the contract expires. Similarly, the seller of the futures contract agrees to deliver the underlying commodity at the time of contract expiry. Generally, institutional investors and commercial users participate in the futures markets for commodities. Speculative retail investors typically access commodity exchanges via their broker.
Recent years have witnessed the emergence and growing popularity of commodities CFDs (Contract for Differences). Such instruments allow traders to speculate on the price movements in various commodities without having to buy or sell the underlying asset.
a Broker for
If you are interested in trading commodities, you will need to first choose the type of instrument in which to trade and the commodity or commodities you would like to gain exposure to. For this, you need to check the product offerings of various brokers since some offer only precious metals, while others may offer precious metals, crude oil, and other commodities. Once you are clear about the type of instrument and the commodity, you will need to finalise a broker.
Here are some considerations for choosing a trusted broker for commodities trading:
Always choose a regulated and registered broker for commodities trading. This ensures that the broker takes the necessary steps to safeguard your interests. Ensure that the broker is regulated by an esteemed regulatory body that has stringent guidelines. For instance, organisations like the Australian Securities and Investment Commission (ASIC) have strict rules in place to protect traders in Australia.
Do check whether the broker offers trading in commodities and the instruments you wish to trade in.
Check the level of leverage being offered by the broker and the consequent margin requirements. Leverage allows a trade to take a significantly higher exposure than the funds available with them. Some brokers offer leverage as high as 1:500. While you choose such a broker, it does not mean you have to use the complete leverage offered as it also comes with increased risk.
4. Fees and spreads
Brokers may charge deposit and withdrawal fees. Also check the spreads on various products. These constitute your cost of trading and have an impact on your profitability. In some instances, the brokerage fees are built into the spread.
Access to an advanced trading platform with improve the ease and speed of trading. Established platforms such as MetaTrader 4 and MetaTrader 5 provide real-time pricing and have an array of tools that can help identify trading opportunities. The one-click trading option and live streaming of prices are other attractive features of these extremely popular trading platforms. Well established brokers also offer a demo account option which allows you to practice trading using virtual currency.
6. Payment options
Check the payment methods accepted by your broker for depositing and withdrawing funds from your trading account.
7. Customer support
The level of customer support offered by a broker is important, especially for new traders. Established brokers will offer continued support via email, live chat and over the phone.
Now that you know how to trade commodities, get ready to diversify your portfolio. Use commodities to to both speculate on prices and hedge risks.