A commodity is an essential good that is mostly used for consumption and is interchangeable with other goods that are similar in type. Commodities are usually inputs or raw materials that are used to manufacture a wide range of goods and services. Commodities trading is the common buying and selling of assets or commodity that includes gold, oil, wheat, beef, and natural gas. Some other examples of commodities that are traded are crude oil, salt, iron ore, coffee beans, rice, silver, sugar and platinum.
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Commodities are known as ‘Basic Grade’ because there are simply grown or extracted in a natural state and sold at the marketplace without any additional value added to them. The commodities are however brought to a minimum state before the sale, but the quality may differ from one producer to another. All the commodities from the same grade are priced equally and can also be exchanged. For example, a barrel of oil would cost the same everywhere, no matter who the producer is.
Commodities occupy a vast space in the global economy and the constant supply and demand lead to volatility which presents an opportunity of investment for traders.
Commodity trading offers a good alternative to conventional investment in assets classes. It can be used by an investor to diversify a portfolio, and protect the existing trade position against inflation. The various commodity exchanges offer traders to buy and sell commodities. However, you can also trade commodity through CFD provided by brokers.
The Commodity CFD allows you to speculate the price movement of a commodity without actually buying or owning the underlying asset. The standard commodities are divided into categories such as
- Metals also called ‘Hard Commodities’ include Gold, Platinum, Silver, Copper and Iron
- Livestock include meat such as beef
- Energy resources include oil, natural gas, and crude oil
- Agricultural products also called ‘Soft Commodities’ consist of wheat, coffee, rice, cocoa, sugar, cotton, and corn
The Details of Commodity Trading:
A commodity market is a type of financial market that involves the trading of physical goods called commodities that can be different metals, energy resources, or agricultural products. Each commodity market is different and will have its own cycles that will be determined by factors such as market supply and demands, and time of extraction or harvest. As a trader, you can open a position in a commodity market based on economic trends.
The commodity market is operated on the basic principle of supply and demand. For example, the lower supply of oil or increase in oil demand can lead to high oil prices. Similarly, higher oil supply can decrease demand and lower oil prices.
The most popular or widely traded commodities have well-established markets where investors trade commodity through cash or derivative instruments such as CFD, Future Contract or Options. The Future Contract on exchanges acts as a benchmark to standardize both the quality and quantity of the commodity. There are two types of Future commodity trading
- Commercial Users of Commodity
This exchange is done between buyers and producers who use Future Contract to prevent any loss due to price fluctuations. The trader will take hold of the commodity when the Future Contract ends. For example, a rice farmer can hedge against losing money if the price of rice falls in the market before the rice is harvested. The rice farmer can sell a contract at a predetermined price by knowing the time of plantation and harvesting.
This option is earning potential profit merely by speculating the sudden increase or decrease in
commodity price movements. The traders do not rely on contracts to make or take delivery of the
The Steps Required to Trade Commodities
To trade in commodity market CFD, you need to open a trading account, and fill an acknowledgement form where you understand the risks that come with Contract for Difference (CFD) trading. There are six steps to consider while doing commodity CFD trading1. Choosing your market
You can decide what commodity to trade CFD such as oil, natural gas or gold2. Buying or selling strategy
You can go ‘Long or Buy’ if you predict the price of a commodity will increase, and you can go ‘Short or Sell’ if you think the value of a commodity will decrease.3. Specify your trade size
You decide on how much volume on CFDs you want to trade on. The value of one unit can vary based on the commodity you have selected4. Risk Management Tools
You can try to reduce the risk by using stop-loss orders which is designed to lower loss for an investor in normal market conditions. The stoporder loss closes the trade at the price you speculated regardless if the market commodity price does not match your speculation, hence it may prevent loss under normal market conditions.5. Analyzing your position
You have to analyze the market after executing your trade. You have to check your open positions and any slop-loss orders to know if you have made a profit or loss. As there is a chance of magnifying profits, there is also a chance that your losses will be magnified.6. Closing your position
The trade-in the commodity market can close automatically or due to a stop or take profit action being prompted. If the trade does not close automatically, then you can close out trade manually when you are ready.
The Characteristics of Future Commodity Trading:
- Option to use trading tools such as leverage
- ‘Margin’ or minimum deposit allows you to gain access to the wide exposure of the market.
- You can go ‘Long or Short.’
- There is diversification due to different types of commodities.
- The commodity retains its physical value even in global economic instability and uncertainty.
- A commodity will hold its intrinsic value even during inflation.
There can be significant opportunity to invest commodity CFD, and as there is no physical delivery, you do not have to pay for any commodity storage. You can benefit from both an upward or downward trend. There is no commission or extra fees for adding funds to your account.
The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.
The Basic of CFD Trading
CFD trading course is designed to give you a firm foundation, enabling you to enter the CFD market with confidence and understand exactly what it takes to trade CFDs. Trading CFDs will require a lot of work on your behalf, and you will need to apply sensible and efficient risk management strategies.