A Breakdown of Trading Commodities
Commodity trading is very much like trading stocks. However, where stock trading concentrates entirely on buying and exchanging shares in a business, commodity trading involves trading assets such as crude oil and gold. Investors buy or sell commodities with the aim of making revenue from the shifts in market prices and changes in global supply and demand.
What exactly is a commodity?
Commodities are goods produced organically by nature and are often the same in terms of quality and purpose regardless of the origin. Commodities are classified as either hard or soft by investors.
- A hard commodity is one which is found by excavating. For example, raw metals, such as gold and copper, are found by mining and non-renewable fuels, such as natural gas and crude oil, are found by drilling.
- A soft commodity is either one which is grown and harvested, such as corn and wheat, or one which is bred and raised, such as cattle and other farm animals.
- The cost of a commodity rests on and is driven by the supply and demand climate. Big companies have customarily been the primary investors and traders in the commodity markets. Be that as it may, as a result of the internet and the accessibility it provides, independent traders and investors currently participate in the purchasing and trading of commodities. Many corporations and businesses rely heavily on commodities to survive, therefore making the commodities market an essential and important aspect of the financial markets.
The instability of commodity prices
The price of a commodity is influenced and driven by the ratio of the supply in relation to the demand. Let’s take crude oil as an example. If the demand for crude oil is more than the supply then prices usually rise, whereas if the supply for crude oil is more than the demand then the prices usually drop. Therefore, as a result of the unstable relationship between demand and supply, commodity trading can be considered volatile when compared to various other stocks and financial assets.
What ways can traders invest in commodities?
1. Direct investments in the commodity.
2. Investments made through futures contracts.
3. The purchase of shares in commodity traded funds
4. The purchase of shares in businesses that manufacture commodities.
Independent investors and traders are currently participating in commodity trading through the internet and various online broker platforms. Usually, for an investor to create revenue from trading commodities he/she must pay close attention to the changes in market prices when buying or trading assets in order to promote and generate optimal results.
What are commodity futures contracts?
Futures contracts are agreements which specify the particular date and time in the future for when a particular commodity should be bought or sold and at what price. Trading commodities in futures involves contracts that control the sale or purchase of a commodity at a specific price. Commodity trading with options indicates when the commodity should be bought or sold at a certain price and on a particular date.