Commodity trading meaning
In a layman’s understanding, commodity trading refers to a sophisticated type of trading where economic sector products like gold, oil, cocoa, sugar, etc. are sold. It is like the stock market, but instead of shares, commodities are sold here. Commodities provide you with a safe route to better manage and secure your financial assets like stock bonds & closed funds. It’s usually the best way to park cash during falling stock prices. They are basically four (4) categories of commodities namely:
- Metals which covers everything from gold, silver, and also, platinum & copper.
- Energy includes crude oil, natural gas, gasoline etc.
- Then, Livestock covers meat products like cattle, pork, etc.
- Agricultural commodities cover major cash crops like cocoa, cotton, coffee, rice, etc.
Historically, commodity products like gold have been used by many investors as a safe haven in times of volatility in the stock market.
What are commodity markets?
Commodity markets are a place where buyers and sellers trade commodities like oil, metals, etc. instead of manufactured products. Usually, commodity trading is done in future market using future contracts. Now, a future contract in layman’s term is an agreement between the buyer and the seller to trade in the future on a specific commodity and price. What this means is sellers, negotiate certain contracts with buyers for the future sale of commodity products. This agreement will be binding regardless of the future rate of the product, hope you’re getting a better idea of this?
The best example of this is seen in the operation of the airline sector, here operators secure a bulk load of fuel at stable prices from sellers. They do this for planning purposes in anticipation of the rainy day. This ensures they have enough fuel in stock and won’t be immediately hit by scarcity in the market.
Commodity trading basics
As earlier stated, future contracts are used to invest in the commodity market. They are available for every commodity categories. The commodity markets have two major investors;
- The main commercial users of the commodities and then,
- The speculators
Now amongst these two groups, the first group engages with manufacturers for future contracts, and in the end, they take delivery of the commodity. The speculators, on the other hand, anticipate for loopholes in the future contracts. They profit from any eventual change in the future contract price. This is professionally done, and they close out the deal before the contract is due because they don’t actually take delivery of the commodity.
Nowadays, commodities trades online, and the process is straightforward although you must do your homework before venturing into this. It is imperative you learn and understand the underlying demand and supply rules or policies guarding the asset(s) you wish to invest in. You’ll need an experienced commodity broker of course who specializes in online trading. Online trading has brought about serious changes to the market. It has dramatically improved the speed of execution and made the whole process more efficient.
In summary, the market presents lots of investment opportunities for a novice, but you must evaluate the risks involved. It is highly recommended you only invest 10% of your funds to commodities.
Commodity trading is, without doubt, a great investment option. As a beginner, it’s advisable to trade with caution because the market can be affected by some unforeseen contingencies like disasters and these are usually unpredictable.
The purpose of this article was to give you a basic understanding of the commodity trading business. If you want to get a detailed understanding of the market, click here.