Categories of Commodity Market
Commodities can either be grown, produced or extracted. They can mainly be categorized into four:
Agricultural: they include food crops, livestock or industrial crops. Food crops are such as rice and coffee, industrial crops are crops like rubber.
Energy: They consist of petroleum products, gas, uranium, and electricity.
Metal: they include both precious and base metals. Precious are metals such as gold and silver while base metals are metals such as copper.
Environmental: Environmental commodities are products such as carbon emissions, and renewable energy certificates.
Drivers of Commodity Prices
Every commodity has its factors that affect its price. Most of the time the prices are influenced by demand and supply.
When the commodity demand is high, the price will also be high. The demand will also be affected by consumer habits and the state of the economy.
When there is a surplus in supply then the demand will go low and that will affect the price. Many factors affect the supply of commodity such as weather, government intervention, war, etc.
The US Dollar which is the main currency being the world’s reserve currency can influence commodity prices. When the price of dollar drops, it makes you use more dollars to purchase the same time. When the dollar is strong, you will use a few dollars to purchase the product. Many factors can affect the USD such as the GDP that can weaken the dollar and lead to a higher commodity price.
Buyers in the market will always look for substitution when they are looking to invest in a commodity. When the price of a certain commodity rises, then buyers will be pushed to go for cheaper substitutions.
Weather can influence commodity prices. When it comes to agricultural commodities such as crops, weather can influence production. When it comes to energy commodity, the weather changes such as storms or snow can affect extraction and that will ultimately affect the price
Watch this video: Commodity Trading – Pockets of ‘value’ in commodities markets (07mins 53secs)
Is it Worth Trading in Commodities?
Trading is a good investment option and some of the main reason that you should look into trading commodities include:
Diversification of your investment
No matter the kind of investment you have, it is good to diversify. The cliché goes do not put all your eggs in one basket. Many people believe in real state and stocks, but commodity trading is a good alternative.
With the growth in population, it is clear that there will always be a demand for commodities. There will always be a demand for agricultural commodities and infrastructure. The main beneficiaries will be emerging economies such as Asia and Africa.
Commodities are a great escape from inflation. With inflation, commodity prices will increase and that means that investors stand a chance to get higher returns from selling their commodities at a higher price.
How to Invest in Commodities
There are several channels of investing in commodities and they include:
This is whereby you physically purchase a commodity and store it until the price rises to sell it. This method will however not work for perishable goods or goods that require special storage such as gas. If you are considering investing in a physical commodity, it depends on what you are investing in. Somethings such as precious metals require secure storage and that may make the cost of investment to be high.
This is a kind of contract that allows a trader to buy a certain commodity at a certain price in the future which is normally the expiration date. Traders do not have to physically possess the asset to know about the prices. With the contract, a trader is obliged to pay for the contract at the time of purchase. If the prices rise in between the contract, that will be the profit a trader gets. When the price drops, it is the loss that a trader gets.
Just like futures, you don’t have to physically possess a commodity when investing in it. Options are also a form of contract that gives you the ability to trade the changing value of the commodity. With options, it can either be calls or puts. Calls are associated with buying whereby one has the right to buy a commodity at a certain price before the expiry date. Puts in associated with selling whereby one has the right to sell a commodity at a certain price before the expiry date.
An ETF is an exchange-traded fund which is a type of fund that invests in certain financial assets. A trader can invest in an ETF through an exchange or broker. ETFs are not limited to stocks but also deal with physical commodities such as gold. With an ETF you can invest in a range of assets through just one fund.
Commodity shares represent the shares of the companies that are producing commodities. The concept of commodity shares is that an increase in the commodity price will lead to an increase in company revenue and that will automatically mean the share price will increase.
Contracts for Difference (CFDs)
They are also instruments can be used in commodities markets. A CFD is a contract that is normally between an exchange and a trader whereby at the end of the contract the two parties share the price difference at the beginning and end of the contract.
Commodity Trading Strategies
If you are getting started with commodity trading, it is important to look at the commodity trading tips for beginners so that you may know the best commodity trading strategy to use. Once you know types of commodity trading strategies it will be easy for you to choose something that works for you. The strategy you will use will depend on the commodity niche that you settle on.
In short, commodities are just another means of capital storage in the form of physical material. These materials can range from precious metals, such as gold or silver, to other assets such as oil, wheat, sugar, rubber, etcetera. The most popular commodities are oil and gold. When there are times of financial instability, or a financial crash occurs, this is typically when people will shift their capital out of fiat currencies like the dollar or sterling, and into physical materials that will always hold some form of value in an attempt to keep them safe and weather the storm of the financial crisis.
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