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Commodities Trading - Market Overview Before Investing

Tue Feb 16 2021 09:00
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Commodities are among the oldest trading elements and they are here to stay forever. People are trading commodities before stocks, bonds, ETFs, and forex. If you are a beginner and planning to invest in commodities, we are here to help. 

 In this article, we will have a detailed overview of commodity trading along with ways to trade them. One thing you need to keep in mind while trading commodities is market volatility. As compared to stocks, bonds, and mutual funds, commodity fluctuations are higher. 

So, you need to spend more time monitoring them as compared to other trading assets. Earlier, trading commodities was not that straightforward, but today, there are several options. 

Why Commodities trading 

For any investor, commodities are a way to diversify the portfolio along with other assets. The prices of commodities and shares move in opposite directions and it brings safety. Safety in the sense of a commodity provides an extra cushion to the investor's money. 

Some common commodities for trading are metals, energy, livestock, and agriculture. This trading sector gives you the opportunity to make profits in a quick way. Some of the major exchanges dealing with commodity trading are: 
  • Chicago Mercantile Exchange (CME) 
  • New York Mercantile Exchange (NYMEX) 
  • Intercontinental Exchange (ICE) in Atlanta 
  • Kansas City Board of Trade 

Characteristics: 

The complete commodity market depends on the supply and demand balance. Anything that makes changes in supply will impact the demand and vice versa. If the commodity supply is higher, then the prices will be on the lower side. And on the other side, if the supply is low, then the prices will go up in no time. This thing applies to all four major categories. 

Along with supply and demand, there are many commodity market movers. For example, growing countries like India, and China are consuming a higher volume of it. So, due to the high consumption, the supply and availability of metals are less in other countries.  

Available Types 

Commodities are easy to categorize in four major areas which are as below: 

Metals: 

Metals are the most common commodities trading that beginners and experts can do in the market. Some of the popular commodity trading metals are gold, platinum, silver, and copper. These metals can go bearish or bullish in an unexpected way. 

Due to the unpredictable nature of the market, people prefer to trade gold instead of others. As gold is reliable, available, and of high value— people prefer to trade it. Many traders also prefer to hold for a long time because of its good return as compared to others. 

Energy 

Energy commodities are running the world and they are always in demand. No matter if the economy crashes or goes up, all need these commodities. Some of the high-demand items are crude oil, natural gas, heating oil, gasoline, and more. The energy market is also very volatile and it could be more risk-sensitive for traders. 

Higher development across economies and fewer supplies of oil is the reason for the surge. OPEC is a major factor influencing the prices of energy commodities. On the other side, more technologies like wind energy and solar energy also impact them. 

Livestock commodity 

As the name suggests, meat and livestock commodities have pork bellies, live cattle, and more. But, in this commodity trading, only a certain set of investors jump into it. 

Agriculture 

Agriculture is also a very popular category and many investors take interest in them. This category involves soybean, wheat, corn, coffee, and more. In this particular sector, the grains are volatile and they get affected by any situation. 

Any kind of unexpected weather or political impact can bring volatility to it. Investors can take advantage of a growing population and limited production in this sector. But, one thing every investor needs to keep in mind is that the volatility is higher in this sector. 

Ways to trade: 

Now, on this note, let's have a look at how to begin with commodity trading and what are the ways to do it. 

Future contracts 

Most of the traders that have experience opt for futures trading in commodities. It's kind of an authorized contract between two parties of commodity buy and sells. The buyer party promises to buy the commodity when the contract expires. 

And on the other side, the selling party premises that they will deliver the contract when it expires. This feature of futures contracts is available for all types of commodities trading worldwide. And, when it comes to the investor types that take interest in this activity are of two types. 

First are the institutional investors and the second are the speculative investors. Many manufacturing companies use futures contracts to reduce their expenditure. 

The service providers and manufacturers take positions in the commodity market. For example, the airline industry can deal with oil companies to get fuel at some special prices. And, these special prices are only valid till the contracts are not expired. This contract lets companies save money for a specific time. 

Stocks 

Another most popular way of trading commodities is by investing in stocks. This method has less risk as compared to futures trading and this is the reason why it's popular. 

It's the best way for beginners to trade commodities in a safe way. You can invest in any company whose core business is in commodity and related stuff. For example, you can invest in oil companies, crops companies, oil drilling firms, and more. 

If you want to invest in gold, you can go for gold mining companies or refineries. These commodity companies will give a good return on your investments. If you are a beginner and you find futures contracts very volatile, stocks are the best options to pick. 

Stocks in the market do not have that many price swings as contracts. And, another major advantage is that you can buy, sell, trade, or hold them as per your needs. 

ETFs 

ETFs and Exchange-traded notes (ETNs) are two other popular options for trading commodities. They are the same as stocks but it also lets the investors take benefits from the market fluctuations. Investors can take these benefits without investing in futures contracts. 

Traders use ETFs to keep a track of a particular group of commodities or a single entity. Sometimes, the traders use the ETFs to support the commodities that are held in storage. 

Mutual Index Funds 

There is no such rule that will allow you to use mutual funds to invest in commodities. But, there are some commodity index mutual funds that allow you to invest in future contracts. Along with them, you can also invest in other commodity-linked derivative financial instruments

Summary 

Commodities trading is rewarding, you only need to be aware of the ways of doing it. Earlier it used to be very difficult, but now you have many options. If you are a beginner, you can pick the stock options for investing in the commodity market. On the other side, you can also go for futures contracts once you gain some experience. 

Like the other investment options, commodities bring in a good opportunity to invest. You can get started with any of the available commodity trading options and make profits. 
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