Speculating on the prices of commodities that are used in our daily life is known as commodity trading. Traders tend to make profits from the ups and downs of the prices of various commodities. It involves both types of trade which are going long and short.
Traders also use commodities to diversify their portfolio. During the bearish trend of the other financial markets, this market tends to face a bullish trend. Several methods are used for investing in commodities.
Working of Commodity Trading
The Commodity Exchange market is an over-the-counter market that manages all the operations electronically. There are different exchanges in different countries for commodity trading.
For example, in the USA it is the New York Mercantile Exchange (NYMEX), in India it is the Multi Commodity Exchange (MCX), in Europe it is the London Metal Exchange (LME), and many more.
These exchanges work in determining the trading prices of commodities based on various factors. Some of the factors are demand & supply, productions, economic growth, and many more.
Types of Commodities
The major classification of commodities has been done into four categories that are discussed below. All these categories are easily available on exchanges for trading. The categories are:
The primary category of commodity trading is agricultural produce. All the goods produced with agricultural activities are known as agricultural commodities. For example, a few of the commodities of this category are rice, corn, sugarcane, carrots, and many more.
Farmers also use trading prices to book higher profits from their crops. Traders trade when they predict any change in the prices of commodities.
The commodities that are used for producing some kind of energy are known as energy commodities. For example, gasoline, natural gas, crude oil, and other products. These are some of the well-known energy commodities in the world.
These products can earn higher profits as their prices are also higher as compared to the commodities in the first category.
Animals or livestock are classified in this category of commodities. They are also used by people in their day to day operations. For example, cattle, cows, hen, and many more are included in this category.
Traders trade in these also to get a better portfolio diversification and earn higher returns from the commodity market.
The last category includes all the precious and semi-precious metals. These are used whether for industrial or commercial purposes. For example, gold, platinum, silver, copper, and other metals.
These metals are traded as commodities and traders can make good profits from trading in these commodities.
Trading Commodities Using Futures
Commodities can be traded in different ways according to the requirement or preference of a trader. One of the most common ways of trading commodities is using the futures. Futures means speculating on the future price of a commodity.
Trading commodities does not mean that you have to purchase or sell that respective commodity. It involves net settlement between the opening and the closing price of a commodity. Opening price means what is at the beginning of the contract and closing price is at the end of the contract.
Advantage of Commodity Trading
There are several benefits of trading commodities. Traders can earn huge profits as well as diversify their portfolio at the same time. The advantages are:
- High Leverage - The trading leverage available with commodities is very high.
- Liquid Market - The market is highly liquid in nature due to large traders.
- Affordable - Minimum deposits are affordable by every trader in the market.
- Variety - The number of instruments is huge so traders can choose accordingly.
A few of the best online trading brokers operating in the market are:
These brokers are offering a demo account for trading so that beginners get a better trading experience. Traders can start with fake funds provided by the broker. You can also use the educational material provided by the brokers for enhancing your knowledge.
Use trading leverage so that your profits can be increased. Take advantage of the different kinds of analytical tools provided to find better trade opportunities. These brokers are regulated and ensure the safety of your data and transactions.
The Bottom Line
Commodity trading is a good opportunity to diversify your portfolio and get better returns from the market. One of the biggest advantages of it is that you can earn good returns even in a bearish market. This is because the commodity market moves in an inverse direction.
Traders can also make futures trade that is also a profitable decision while you are trading commodities. One thing that is really important is to get a good broker for yourself. Traders need to find the right one that is fulfilling their needs.