Introduction to commodity trading
What are commodities?
For anyone looking to make good returns on their money, various asset classes exist for them to choose from. They differ in their risk, potential return as well as ease of investments. One of these asset classes is commodities. Commodities are raw materials that are used in large quantities in the manufacturing industry. They are very valuable and their trading forms a big part of the trade on the stock market.
Types of Commodities
The main commodities traded are oil, gold, cocoa, cotton, corn, wheat, uranium. They are usually agricultural commodities, energy-based commodities, or metals. Large manufacturing firms use these commodities in their daily businesses.
For agricultural commodities, their usefulness is for human and animal consumption and for the production of products for society. These include corn, coffee, cocoa, sugar, wheat, etc. Many of these commodities are used almost directly in foods or further processed in packaged foods like biscuits, bread, chocolate, and drinks.
Energy-based commodities are mainly crude oil and gas used in the transportation industry and for making other useful materials like plastics, medicines, and electricity. These commodities are usually prone to geopolitical volatility especially when there is political destabilization in major oil-producing countries.
Mineral or metal-based commodities include precious metals like gold, silver, and industrial or common metals like copper, aluminum, and zinc. They are used in a variety of applications from electronics, to building and construction, jewelry, and decoration.
Commodities are traded together with differentiated products so it is important to know how they differ. While commodities can be exchanged because they are all of the same kind, differentiated products are unique and cannot be exchanged. Whereas cocoa is the same anywhere regardless of the source and will be priced the same way, if sweetened cocoa powder is produced, it is different and better than the initial product.
Commodity Trading
Most commodity trading is done on what is referred to as Commodity exchanges or the Commodity market. A commodity exchange is a market where commodities are traded, including derivative contracts of those commodities that include derivatives based on commodities like options, futures, and forwards. You could also accomplish commodity trading via ETFs or futures trading through a brokerage firm. Some common commodity exchanges include the Ghana Commodity Exchange (GCE), Africa Mercantile Exchange (GCX), New York Mercantile Exchange (NYMEX), Bombay Stock Exchange (BSE), Europe Climate Exchange (ECX), Integrated Nano-Science & Commodity Exchange (INSCX), Australian Securities Exchange (ASX), Dubai Gold & Commodities Exchange (DUMX), etc.
You could do spot trades on commodities for immediate delivery but if you are not into that type of investment, you might want to consider futures and options trading. With futures trading, a determined traded amount is delivered at a future time and if you have a good investment sense, the value of the commodity would have gone up by then, giving you a profit. It means that the producers can sell future contracts while the commodities are being produced and are guaranteed the price. A buyer can also be assured of a certain price at a later date. You could also trade financial derivatives, like interest rates and foreign exchange futures.
You need to do your research before you trade commodities. Future trading is often very risky, even though the payoffs are huge and many online resources exist for knowing more about the particular commodity to trade. Generally, commodity markets are incredibly volatile — know how to capitalize on that to your benefit.
Conclusion
Commodities trading can be incredibly rewarding if you manage your risk appetite, invest wisely, and fully understand the market.
