What is Commodities Trading?

Not many people are aware of the importance of commodities in everyday life. Commodities are basic goods that are being utilized in commerce and are interchangeable with similar types of goods. Common examples of commodities are gold, natural gas, grains, and oil. But for investors, they give an added meaning to these common commodities. It helps them in diversifying their portfolio much more than traditional securities. Most of the time, the prices of commodities move in the opposite direction as with the stocks. Because of this, a lot of investors put their trust in commodities especially during times of market volatility.

In the previous years, trading commodities and trade forex required a fair amount of cash, time, and expertise, which means they are mainly open for professional traders. But everything is different nowadays. There are already a lot of individual retail investors who are actively participating in trading commodities.

Four Categories of Commodities

Metal

Some of the examples of metal commodities are copper, gold, platinum, and silver. When market volatility comes, a good number of investors shift to commodities trading and invest in these precious metals such as gold for the fact that its status is always dependable and reliable. For periods in the market with currency devaluation and high inflation, investors also chose to invest in these metals.

Meat and Livestock

Meat and livestock commodities such as pork bellies, lean hogs, feeder cattle, and live cattle.

Agriculture

Some of the most commonly traded agricultural commodities are cocoa, corn, coffee, soybeans, wheat, sugar, rice, and cotton. If you want to invest in grains, take note that it is very volatile in the summer months or during those times when there are strong weather transitions. If you are interested in the agricultural sector of commodities, limited supply in agriculture and population growth can open good opportunities for gaining higher profits as the prices of agricultural commodities are expected to rise.

Energy

Service providers rely mainly on commodities as a means of reducing the possible risks that can be acquired because of the changes in the price. For instance, the airline sector is a huge industry that needs a huge amount of fuel at affordable prices. Due to this reason, airline companies tend to take hedging on futures contracts. These future contracts give these airline companies an advantage as they can buy fuel at a fixed price, in a certain period. This is the best way to avoid market volatility on gasoline and crude oil.

Not just airline companies, farming cooperatives also use futures markets on commodities trading. Given that they don’t hedge futures contracts, volatility present in the commodity market can potentially bankrupt business as they require a high level of predictability when it comes to the prices of the goods.

Takeaway

There are different types of investments for newbies or experienced traders. While commodities trading and trade forex provides easy access to the financial market, it is also very important to understand which type of commodity to trade. Take note that commodity trading can also be affected by things like epidemics, different weather patterns, and disasters which can either be man-made or natural.

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