Commodity trading entails buying and selling a wide range of commodities like natural gas and oil, and precious metals, including gold, silver and copper. It also covers soft commodities like sugar, wheat, coffee and cocoa. Find out how to trade commodities on Tixee below.
Commodities are raw materials used to produce goods; they include fossil fuels, mineral oils and agricultural products. Simply put, they are natural resources consumed by individuals and companies. Investors recognise commodities as physical goods traded, bought and sold in the commodity markets. However, they differ from securities like bonds and stocks, which exist as financial contracts.
The Main Types of Commodities
The leading commodity derivatives investors can trade on include:
- Energy Commodities The energy markets contain various energy products like natural gas, oil, ethanol, uranium and coal. It also covers several forms of renewable energy, such as solar power and wind power.
- Metal Commodities Commodity metals include precious metals, such as gold, silver, platinum and palladium, as well as industrial metals, such as copper, iron ore, aluminium, zinc and tin.
- Agricultural Commodities This category covers several edible agricultural products like grain, cocoa, wheat and sugar. The included nonedible commodity instruments include palm oil, rubber and cotton.
- Livestock and Meat Commodities These commodities contain all animals reared for food consumption and products, such as pork bellies, lean hogs, live cattle, feeder cattle, gelatine and leather. Notably, the change in supply and demand in a single economy and worldwide makes the prices of commodities shift continuously. For instance, an increase in oil production in the Middle East leads to a decline in the world’s price of oil. Sophisticated investors in the commodities market aim to benefit by taking advantage of supply and demand trends. They also lower the risks through portfolio diversification, including a couple of asset classes to their custom portfolio.
Which are the Popular Commodities in the World?
Gold, silver, Brent Crude Oil, US Crude Oil, copper, natural gas and coffee are the prevalent commodities in the commodities market. Other products, such as sugar and wheat, also feature as top-traded commodities. Gold – gold has been a treasured metal for thousands of years, and it’s attested by the California gold rush of the 1840s. An increase in the price of gold could be a result of political events, uncertainty or turmoil because investors often opt for this precious metal when various financial instruments are falling. Silver – it is a valuable metal with applications in electronics, jewelry, and silverware. Like other raw materials, the supply and demand balances affect silver’s market price. Copper – with usage ranging from electric wiring to fertiliser, copper is amongst the top-rated metals. This metal is in plentiful supply, meaning industrial applications impact its price movements more than supply. When trading on this item, traders usually take a position depending on the world’s GDP and growth because economic health affects the copper price. Crude oil – it suits day and swing traders who want to benefit from quick fluctuations in commodity prices. Natural gas – demand for clean energy and growth potential attracts investors to natural gas. Coffee – when it comes to trading commodities, coffee trading is amongst the most volatile because its supply is reliant on agriculture in emerging and developing economies. The demand, on the other hand, is high in the Western markets.
An Overview of Commodity Trading
Commodity trading is an exchange of a couple of assets, mainly futures contracts depending on the trading costs of the underlying physical commodities. When individual investors buy or sell these commodity futures contracts, they can trade on the anticipated future value of a specific commodity. If commodity traders think the price movements of commodities will rise, they either go long or buy specific futures. On the other hand, if they think the commodities prices will fall, they go short or sell other futures. Considering the significance of commodities to everyday life, it’s evident that commodity investing started way before the invention of modern financial markets. In the early days, ancient empires invented trading strategies for exchanging their items. Currently, commodity markets are complex because there is a long list of countless commodity exchanges on the international market. Luckily, investors can trade commodities virtually 24/7.
Factors that Affect Commodity Prices
- Supply and Demand The price of commodities stays the same when supply balances out with demand. Nonetheless, whenever the market anticipates a high supply due to increased production and good weather, the prices tend to decrease, and vice versa. Low supplies lead to high prices.
- Stock and Inventories Crop diseases, employee production problems, weather, economic and political circumstances that form extra charges like trade laws, taxes, and government subsidies impact commodities prices.
- Currency Strength The link between forex pairs and the globe’s top traded commodities exists. For instance, the Canadian Dollar (CAD) affects oil prices because Canada is among the leading oil exporters. So, commodity traders who evaluate these types of connections have a good chance of making the ideal trading decisions.
Why Invest in Commodities?
This market is attractive to commodity traders because it provides the following:
- Security Investing in some commodities like gold is advisable, particularly in a turbulent market. The appeal of gold makes it increase in price or even retain value during problematic economic settings.
- Good Returns on Investment The drastic changes in commodity prices indicate that commodity traders who use the right commodity trading strategies can benefit from price fluctuations in liquid markets.
- Diversified Portfolio Substantial exposure to commodities is an excellent source of portfolio diversification because it shows a correlation with bonds and equities.
How to Trade Commodities
- Gold The gold market enjoys exceptional growth and diversity due to its use in technology and jewellery. Investors and central banks, and that’s why it increases in price even in challenging economic periods. If the US dollar demand drops, gold prices rise. If the central bank buys additional gold to diversify its monetary reserve, gold demand increases.
- Investing in Gold Traders can possess gold as a physical commodity by buying gold bullion bars or coins. The gold needs to be stored in a vault, deposit box or safe place. Other methods of trading commodities, such as gold, involve going through the futures contract and mutual fund options. This investment method is challenging due to the cost of storage.
- Crude Oil If one decides to invest in crude oil, it helps to recognise how to trade in this commodity and what impacts its prices. After production, oil companies can refine the crude oil in various products. All in all, supply and demand for oil affects its price.
- Investing in Crude Oil Trading in physical crude oil is challenging compared to other commodities because buying an oil barrel is tricky. For example, traders lose their investment product when commodities at spot price rise and get good returns during the decline. Thus, it would be wise for traders to buy crude oil mutual funds, stocks in oil companies or even commodity ETFs. These options contain reduced risks because they contain diversified offerings.
Investing in Commodities via Futures
The best way to trade commodities is via futures contracts. Investors get the following benefits by taking part in the commodities market through futures:
- Analysing is quick because it’s a general evaluation of the underlying commodity.
- Opening a minimum deposit account with commodity brokers gives one total control over the full-size contracts.
- It’s fast to initiate short and long positions.
However, the risks are high due to big margin requirements.
Investing in Commodities via Stocks
Commodity stocks are common among traders who want to invest in company stocks linked to a commodity in some ways. For instance, traders concerned about the oil market can invest in tanker companies, oil drilling companies, refineries and other diversified oil companies. Those who are into the gold sector and are against buying gold in dollars should consider buying stocks of mining industries, refineries, smelters, and other companies that deal with bullion. Buying, holding, trading and tracking stocks is straightforward. Of course, investors need to evaluate the independence of investment research by various organisations to ascertain whether a particular company is a perfect investment.
Investing in Commodities Through Exchange-Traded Fund (ETF)
ETFs are similar to stocks because they enable traders to potentially benefit from commodity price movements without directly investing in contracts. In some situations, traders support ETFs with the actual commodity in store. The beauty of ETFs is they allow traders to take part in the price movement of a basket of commodities.
Investing in Commodities through Commodity Pools
Commodity pool operators (CPOs) are individuals who collect money from traders and then combine it into a single pool to invest it in options and futures. Traders opt for these professionals because they can benefit from their specialised advice.
Trading CFDs on Commodities
Trading commodities in futures needs a substantial upfront investment and involves leverage, meaning losses can increase. Due to this, commodity substitution trading methods exist to help investors. Here is where trading commodity CFDs comes in handy. Liquidity is never a problem when investing in commodity CFDs. The other thing is that trading commodity CFDs gives one control over the leverage and ability to trade with minimal commodity funds.
Commodity Spread Trading Strategy
This commodity spread strategy requires traders to take opposite positions within similar markets. It is a less risk management strategy than the futures contract because it expires after weeks or months. Investors can use this method, hoping that the spread’s margin rates increase positivity in the long term.
Is it Worth in Commodities?
Trading commodities suits experienced investors the most. Before investing in any commodity, investors must thoroughly understand the commodity price charts and combine them with any helpful trading strategy. One should also have a high-risk tolerance because market movements can result in high gains and losses. In general, traders should accept short-term losses as they pursue long-term successes. The best investment strategy to include when trading in commodities is to invest a share of the total portfolio.
”It’s worth noting that most traders and investors who want to diversify their portfolio in an asset class use 20% or less of their portfolio for high risk/reward”, says Turner.
Like any other investment advice that traders consider before making the ultimate decision, it is worth contacting financial advisors. These experts will assess commodity investment and decide whether it’s the right thing besides helping one derive some strategies to include in trades.
A Piece of Advice from Tixee
Remember that commodities are more volatile than other types of investment, particularly funds that track a specific economic sector or single commodity. Traders who invest in futures need to know it entails speculation. Therefore, futures contracts include tracking the existing commodity asset or index. In the end, it affects the contract’s performance, and in the process, gives traders positive or negative differences. To some extent, technical analysis and fundamental analysis works in all financial markets. Always use an appropriate trade size.
How to Trade Commodities on Tixee
To start online commodity trading, traders need to first sign-up at an online trading platform like Tixee. An excellent way to get started on this platform is to start small, use risk management orders and stop following personal circumstances. Tixee is globally recognised, regulated, licensed, focuses on customers and provides the necessary steps to let clients start investing in commodities.