A Beginners Guide to Commodity Trading

This, I think, is a fitting followup post after the post on Spread betting. I think commodity trades offer an alternate approach to trade your money for gains. A stock price fluctuate depending on the economy same is the case with commodities. Other important factors in commodity price fluctuation are weather, demand, supply etc.

What is commodity trading

Let’s begin with the definition of commodities trading. It’s actually self-explanatory: it refers to the process of exchanging commodities in the market. Commodities are usually resources, such as mineral or produce, that are considered to be of high value for a lot of investors, are produced in massive quantities, and possess attributes that remain the same all throughout the years.

A good example is gold. Gold is a commodity since it’s a very precious metal and valuable. In fact, the price of gold can be worth thousands of dollars in the market. There are also several countries that are currently offering, selling, and buying gold. Lastly, the characteristics of gold haven’t changed ever since it’s been discovered many years ago.

Investment options in commodity trading

Commodities can either be traded on spot market or futures market.

Commodity trading is not particularly complicated. Most commodities trading is done in the form of futures or options. Since it inherently involves predictions of the future and hence uncertainty and risk.

While in the stock market there are thousands of potential stocks and mutual funds, there are only about forty viable futures markets to trade. Those markets cover the gamut of market sectors, however, so you can diversify throughout all important segments of the world economy. Few of them are listed below.

• Corn
• Rough rice
• Cocoa
• Milk
• Wheat
• Soybean meal and oil
• Crude oil
• Ethanol
• Propane
• Natural gas
• Live cattle
• Silver
• Palladium
• Nickel
• Cobalt
• Recycled steel
• Tin
• Aluminum

How do you trade in the commodities market?

It’s really not that different with stocks and forex. That’s why if you already have some experience with the two, commodity trading shouldn’t be so difficult for you. In general there are still two people involved: buyer and seller.

These goods are currently traded at a certain prices, and it’s up to you whether to sell or buy the goods that you currently have.

Further, a lot of factors can affect the overall values of your commodities, majority of which are macro or large scale. This includes the present demand and supply of the goods. If the demand of certain commodities is high but their supply is low, you can expect the prices of these commodities to go up. Inversely, if the supply is high but the commodities low, the prices will definitely drop.

The supply and demand, however, can be influenced by numerous things such as weather, government policies, and consumer behavior. For example, if a lot of milk brands are found to have harmful bacteria, the price of milk in the market will definitely decline as the demand for it also goes down.

Like in Forex trading, you can have as many commodities as you like, and you can trade different ones all at the same time.

How do you keep yourself updated with these prices?

There are so many ways. The first thing I do is to check out websites such as CNN Money and Yahoo Finance. There you can keep track the changes in the market in real-time. You can monitor the price movements real-time on your broker provided online application.

It also helps if you subscribe to reputable blogs on commodities trading. You will receive not only loads of tips but up-to-date information on the prevailing prices for commodities. You may even get some hints on certain trends, so you can already make wise decisions beforehand. It also pays to subscribe to agriculture and mineral agencies.

I have to stress this. Commodities trading doesn’t guarantee you anything. It’s like any form of investment. There will always be risks involved. Even if I’m still new, I already experienced losing some money on the end. Nevertheless, being more aware about it and what you can do to increase your chances of earning big can reduce consequences.

My very first advice is to get a commodities broker. Don’t worry about the cost, as the pros outweigh the cons. You’ll have more time for other things, there’s someone to help you think, and you can invest even if you’re busy with something else. If you do your research well, you’ll surely find legitimate and professional brokers today.

Second, don’t immediately believe in the hype. Though it’s good to read general news so you’ll be updated, avoid taking anything you read as gospels. Some of them are plain marketing ploys. Besides, plain assumptions are different from inferences. The latter is based on evidence. Just because people are already shifting to renewable form of energy, the cost of crude oil will go down. In fact, it has risen numerous times this year.

Third, spot trends. You’ll know there’s a trend if you can already see some patterns when it comes to movements. Determining trends is one of the best ways to know when to invest in commodities.

I do not trade on commodities. I do not advise you to trade commodities either if you’ re on a tight budget. Honestly, to me, trading is a form of gambling in a better sense, but, at the same time, it’s an art to those who can master it. There’s a huge risk of losing all your money, be it stock trading or commodity, story is same.

What do you suggest, readers?