What are Commodities?
Commodities are goods that are in broad demand and are pretty constant and do not differ much in terms of quality. For example, gold is gold whether it’s mined in Africa or Australia.
Because of this standard in quality, these goods become useful tools for investment and trading. When you buy a barrel of crude oil for example, you know what you’re getting and you won’t get short-changed or cheated.
Examples of goods and products that can be traded as commodities include:
- Precious metals such as gold, silver and copper.
- Agricultural products such as rubber, corn, rice and sugar.
- Energy and industrial resources such as crude oil, coal and aluminum.
- Non-traditional “resources”. Entrepreneurial people have started talking about “natural capital” and trading carbon emissions and weather.
When people talk about trading commodities, the majority of them are not actually buying one tonne of sugar and then selling it a week later.
Commodities are commonly traded using derivative tools such as futures. Buying a futures contract of an underlying commodity means you are buying the right to buy the commodity at a certain price at a certain future date. In the meantime, the actual price of the commodity goes up and down from day to day. This fluctuation makes the futures contract either go up or down in price depending on which direction the underlying commodity’s price goes.
The Commodity Market
Commodities are traded internationally, and are traded on various exchanges around the world. Examples of these include the Chicago Mercantile Exchange, Australian Securities Exchange and the Tokyo Commodity Exchange. These exchanges act as marketplaces where commodity futures contracts can be traded and exercised.
The prices of commodities rise and fall. Some are cyclical, while others depend on the current economic outlook and political circumstances. For example, the price of agricultural products like corn and rice fluctuates depending on the time of year, and also on the year’s harvest.
On the other hand, commodities such as crude oil are very dependent on economic and political situations. For example, if there’s political instability such as war or government problems in the Middle East (where most of the oil producers are), the price of crude oil would rise. And the price would rise if the economy and industry are strong, and energy consumption is high; and vice versa.
Why trade Commodities?
The cyclical and trending natures of commodities provide investors with the opportunity to trade in commodity futures. Investors are able to earn from trading commodity futures by being able to predict the cycles and profiting during economic and political upheavals.
Commodity futures can also be traded to hedge against the chance that the underlying commodity doesn’t produce expected output in the current cycle. Companies whose business involves those commodities would then hedge against that and earn some money from commodity futures even though their products don’t sell well.
For investors and casual traders, commodity trading represents another method of trading other than shares or currency. The risks and rewards are similar, differentiated by the underlying commodities being traded.
If you are interested in commodity trading, Ebele Kemery suggests to do some research on the commodity you want to focus on, and analyse how its price varies depending on annual cycles as well and political and economic changes.
Ebele Kemery has a decade of experience in Finance, Investment Management, Sales, Trading and Commodities. She is a Commodities Leader with a track record of consistently profitable trading efforts. Expanded business through understanding of client needs and developing customized solutions that leverage a wide variety of techniques and market intricacies. Satisfy all risk management requirements. Consistently promoted; recognized for development and leadership strengths.
To read more please click here