Learning the Basics of Commodities Trading

Commodities trading is a very lucrative way to earn money from the financial markets. Because, one way or another, commodities are a big part of everyone’s lives.

What are Commodities?

Put simply, commodities refer to raw materials that one can buy or sell and turn into something else and eventually consume.

And in terms of trading, one commodity is often interchangeable with another of the same kind. For instance, you don’t really care whether a bag of wheat is the same as another bag of wheat. You can easily exchange them.

Types of Commodities

Commodities have a lot of sizes and shapes. But in the world of trading, the following are the most common types.

  • Metals – these include gold, silver, copper, and platinum.
  • Energy – these include oi, natural gas, gasoline, and heating oil.
  • Agricultural – these include soybeans, wheat, cocoa, coffee, sugar, cotton, corn, and rice.
  • Livestock and Meat – these include pork bellies, feeder cattle, lean hogs, and live cattle

Among these commodities, precious metals like gold and silver are safe havens. That means they tend to appreciate in value in times of market turmoil and uncertainty.

Gold, for example, has historically retained its intrinsic value regardless of whether the economy of booming or not. You can use such commodities to hedge against inflation and even times of devaluation.

How to Start Commodities Trading?

There are a variety of ways to start trading commodities. One such way is to invest directly in them. That means directly buying the items and then selling them or turning them into cash one way or another.

You may find, however, that buying a large herd of cattle isn’t really your cup of tea. So here are some easier ways to trade commodities.

Commodity Futures

Futures are a very popular way of trading commodities. These are contracts that basically let you buy or sell a specific quantity of the commodity at a specific price and at a specific time in the future.

You can trade futures on every commodity. And the main users of commodity futures are institutional commodity companies and speculators.

Commodity Options

Options are another kind of derivative that let you speculate on the commodities market. But first, do note that most investors speculate on commodities market through the stocks of companies that deal primarily with commodities.

Now, instead of buying the stocks of such companies directly, options let investors benefit from lower costs and become more flexible in their dealings with the commodity-linked company.

Commodity ETFs and Notes

Exchange traded funds and exchange traded notes also let you participate in the commodities market. But first, what are such funds?

Commodity ETFs are funds that follow the price of a commodity or group of commodities by using futures contracts.

Meanwhile, ETNs are unsecured debt that aims to mimic the price fluctuation of a particular commodity or commodity index.

Overall, choosing commodities trading may be a rewarding decision for those who are already familiar with the markets. However, for beginners, it will surely take a lot of research, time, and patience to get going.

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