What are Сommodities?

While carrying out our daily activities, we come across various commodities. Some of them are commercial elements, which are tradable assets bought and sold on a global scale. If you read on, you'll understand the meaning of commodities and the various types. We'll also explore the mechanics of the commodity markets and how to become a profitable commodity trader.

By definition, commodities are the primary goods or raw materials used in commerce. With that said, they happen to be the building blocks of many goods and services. Commodities are a different class of assets, like bonds and stocks.

A key feature of commodities are:

• Standardized;
• Interchangeable.

This implies that two equal units of commodity A and B have the same quality and price regardless of where or who produced them.

Types of commodities

When classifying commodities, you'd want to look out for expressions such as soft and hard commodities. Natural resources that must be mined or extracted are called hard commodities. These include gold, rubber, oil, etc.

In contrast, soft commodities are those that include agricultural or animal products. Examples include cereals, beef, sugar, etc.

As you would expect, not all commodities are traded at the same volume. Oil is a significant source of revenue for industrialized nations. It is the world's most prominent energy source for many decades and the most traded commodity on national and international markets.

Commodities are grown, mine, or produced; thus, we can group them into four categories. These are:

• Livestock/meat commodities;
• Metal Commoditie;
• Energy commodities;
• Agricultural commodities.

Agricultural commodities

A 2018 study revealed that over 1 billion people work in the agricultural sector. This number represents over 14% of people in the world. Agricultural commodities include consumable goods and farming products.

This asset class includes crops and animals grown or raised on farms. Coffee is the most traded commodity in this category. Others are meats, dairy, cereals, rubber, and miscellaneous agricultural products.

Metal Commodities

Metal commodities can either be base metals or precious metals. They consist of all mined minerals and are standardized on regulated exchanges.

Base metal examples include:

• Nickel;
• Steel;
• Aluminium;
• Copper;
• Tin;
• Zinc;
• Lead;

They are used in the construction, electronics, and automobile industries.

Also, precious metals fall under investment tools or store value in jewelry and other ornamental items. Examples include:

• Gold;
• Palladium;
• Platinum;
• Silver.

Energy commodities

Energy remains the most traded class of commodities due to high volatility. Examples include crude oil, heating oil, natural gas, coal, electricity, and uranium. Availability, price, and supply of these commodities are subjected to economic and political developments worldwide.

Livestock/meat commodities

Livestock commodities are raised primarily for their meat, milk, or hides. They include lean hogs, pork bellies, live cattle, and feeder cattle.

What is commodity trading?

Commodity trading dates back between 4500 and 4000 BCE in Sumer, modern-day Iraq— it is as old as civilization itself. The current global commodity futures market can track its origins to Sumer. However, in Amsterdam, the first organized exchange for trading commodities started in 1530. Commodity trading involves the buying and selling of a wide variety of instruments on exchanges or via derivatives.

The tradable instruments include energies such as oil and gas, metals, and other types of commodities. In ancient Iraq, traders exchanged clay tokens enclosed in a clay vessel to exchange goods. Clay writing tablets symbolized the number of clay tokens inside every enclosed vessel. The trader would deliver the specified amount of goods

Why Trade Commodities?

Commodity trading has many benefits and happens to be an exciting and sophisticated investment type with increasing participation in recent years. Here are some of the reasons you should trade commodities.

• Hedging or Mitigating Risks

Stocks and bonds are negatively affected during wars, natural disasters, or economic crises. Investors can use commodities as a potential hedge to mitigate the risks associated with such uncertain times.

• Diversification of Portfolio

It is a fact that when bonds and stocks fall, commodities tend to rise, and returns usually have low or no correlations with those of other major asset classes. Consequently, broad exposure to commodities is an excellent source of portfolio diversification and a way of improving risk-adjusted revenues.

• Inflation protection

Inflation does not affect commodities as they when compared to financial assets like stocks and bonds. Financial assets depreciate when inflation sets in while commodities sustain their value and price even during high inflation or economic crises.

Commodity Exchanges

A commodity exchange is a legal and regulated marketplace for trading between buyers and sellers of standardized commodity-based contracts. Exchanges come in different levels and sophistication. Versatility depends on purposes, institutional ability, and operational models. It is a massive market with transactions amounting to trillions of dollars daily. The most traded commodities include gold, silver, crude oil, and copper.

An exchange can aid a meaningful physical trade of a commodity or cater to price risk management and speculation. The Chicago Board of Trade (CBOT) came into existence in 1848, and it set the foundations for global commodity trading. It traded on agricultural commodities, including wheat, corn, and soybeans. It currently grants options and futures contracts on a broad range of commodities, including U.S. Treasury bonds, metals, and energy. Other notable exchanges in world trade include:

• The London Metal Exchange (LMC);
• Chicago Mercantile Exchange (CME) – the U.S.;
• Multi Commodity Exchange (MCX);
• New York Mercantile Exchange (NYMEX) – the U.S.;
• Australian Securities Exchange (ASX) – Australia.

How to invest in commodities

There are exciting ways of investing in the commodity market. Aspiring traders must study each of these methods to pick one that suits your style and ultimately meet their trading goals. Ways of investing commodity include trading CFDs, ETFs, options, shares, futures, and trading the physical commodity.

CFDs on Commodities

If you are looking for one of the best ways of trading commodities, CFDs are the answer. Contracts for difference, CFDs remain one of the most popular ways of trading commodities. CFDs are a derivative product that allows traders to speculate on an underlying asset's price movements without the obligation of owning the asset itself. The popular tradable commodities on CFDs include Natural Gas, Oil, Gold, and Silver.

Trading commodity ETFs

ETF stands for exchange for traded-funds. A commodity ETF is an exchange-traded fund (ETF) a trader uses to invests in physical commodities. It applies to commodities, including agricultural goods, precious metals, and natural resources.

Investing in The Physical Commodities

Investments in physical commodities involve purchasing the goods directly from the manufacture and selling at a higher price to earn a profit. This method requires having to for storage and security, which could be expensive.

Trading Commodity Options

Trading commodity options allows traders the right to trade without the obligation to buy or sell the underlying asset at a fixed price on or before a specific date in the future. There are two types of contracts for options. These are 'calls' and 'puts' contracts.

When you buy a put option, it gives you the right and not the obligation to sell the underlying asset at a proposed strike price by the proposed expiry date. However, when you buy a call option, it provides you the right without obligation to purchase commodities at a strike price by a predetermined date.

Commodity Trading hours

The table below shows popular commodities, their symbols, and trading hours.

Commodity Trading Platforms

Trading with a regulated forex broker is essential for success on international currency markets. Traders have specific needs and requirements when shopping for trading platforms. It is crucial to select a broker with features that suit your trading goals and objectives. While there are countless trading platforms out there, here are some of the most notable names: NSFX, IG, Saxo Bank, CMC Markets, TradeStation, and Interactive Brokers.

How to Become a Commodity Trader

A Commodity trader is a financial expert who buys and sells commodities. This practice is extensive and comes with many opportunities on offer. Here are the necessary skills needed to trade successfully.

Research

Global economic and political developments play considerable roles in commodity prices across the globe. Consequently, a commodity trader should be an expert information researcher. It would help if you desired to find all the relevant data that influences the availability, supply, and demand for your trades.

Find Your Niche

You can trade various products on the commodity markets. Finding and focusing on a particular niche will increase your understanding and success rates. It would be best to focus on acquiring actionable data that affects the trades in your niche.

Analytical Research

Once you have valuable data that affects your trades, you'd need to understand how to analyze it. Technical skills help you interpret trends and data represented on charts, indicators, and technical analysis patterns.