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.
• Rough rice
• Soybean meal and oil
• Crude oil
• Natural gas
• Live cattle
• Recycled steel
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?
I am looking into commodities for a while and this provides a great breakdown. The process of going from being a passive investor to a active one takes a bit of time and a shift in mentality, at least for me.
I am not sure if you cna be passive investor in commodities. You need to be actively trading in commodities.
LaTisha @YoungAdultFinances says
A good resource can also be found at CME.org. They offer 15 min delayed pricing and have webinars for learning more. I tried demo trading commodities for a little while but realized that I like forex better.
That’s good to know Latisha.
Newlyweds on a Budget says
I love these beginner guides to investing, because we are slowly trying to dip our toes into the water. You explain it so well too!
Thanks Ericka! I appreciate your comment. Love be of any help. As you know this blog is my learning tool as well.
Kevin Mzansi says
The first time I heard about commodities was in the sitcom: “Major Dad” when one of the characters, Gunny, made some money and bought herself a red covertible 🙂
I have looked into it a couple of times. It always seems like too much to keep track of, though. Commodities are supplied and demanded all over the world, so a supply disruption, for example, could happen in an obscure country in Asia or Africa and disrupt the supply-demand balance, causing the average investor to lose money without ever knowing why. On which news source will you hear if there is a possible power shortage in Khazakstan that will affect oil supply to Russia, for example. It seems like this market is heavily tilted to professional investors, who have a serious information advantage to you or me and hence have a greater chance of taking our money versus us taking theirs. This is why I decided not to pursue the subject.
To me it seems a little bit like gambling with the odds stacked against you. It would be interesting to hear from someone who has made money in commodities consistently…
That’s a wonderful insight Kevin. In global economy nothing is isolated. I tend to agree to your point that we as investor posses much less resources than a pro investor.
Commodities trading is quite interesting but, either luckily for me or unfortunately (not sure yet) I am not an active investor. I am working on different goals. For now.
I am on the same boat. At some point of time I want to try that. Just to learn it and then make a decision to stick with it or forget it.
I also think like you, But one of my friend suggest me to invest only some rupees in commodities. I Accept his proposal & invest only small amount of money by getting experts Commodity tips. Next day i got profit & from that day i am regular trader of commodities. Sometimes i have to bear loss, but its covered by next calls.
Now, this also becomes the good source for income.
Capital Vraddhi says
Awesome article. Nicely explained. A person who doesn’t know about commodity can easily understand by reading this thanks for sharing.