Commodity Trading | Investing in global commodity markets

In general, commodities can be divided into four main categories:

Agricultural commodities: food crops (cocoa, cotton, corn, coffee, etc.), livestock (cattle) and industrial crops (including wool and wood).

Energy commodities: natural gas, crude oil, gasoline, coal, uranium, ethanol, and electricity.

Metal commodities: base metals (such as iron ore, zinc, aluminum, nickel, steel, etc.) and precious metals (gold, silver, palladium, and platinum).

Environmental Goods: Renewable Energy Certificates, Carbon Emissions and White Certificates.

Although the Swiss Financial Market Supervisory Authority (FINMA) and the US Securities and Exchange Commission (SEC) tend to regulate cryptocurrencies as something similar to stocks, some still believe that they can be referred to as commodities as well. Bitcoin is referred to as “digital gold” and many cryptocurrencies are “mined”. In essence, cryptocurrencies act like commodities, in that they are free from external control and their values ​​are determined by market factors.

There are several main reasons for trading commodities:

Diversification: Having commodities in your investment portfolio can reduce your risk because there is no direct relationship between commodities and other asset classes.

Safety: Commodities can be a safe haven in times of global economic uncertainty and market turmoil, as they always hold their physical value.

Inflation hedge: The intrinsic value of commodities is independent of currencies. Commodities often retain their value even if the currency depreciates during the period of inflation.

Speculation on Commodity Prices: Commodity trading requires careful consideration due to the high volatility in the market from time to time and the wide range of instruments available for trading such as futures, CFDs, stocks, etc.

For commodities, the opportunity for big profits goes hand in hand with the risk of big losses. It can be very difficult to predict the price of commodities, as the latter can change suddenly due to several factors, such as weather, political unrest, and labor strikes. And unlike stocks, there are almost no underlying financial metrics, such as price/earnings ratios, interest rates, etc.

A contract for difference (CFD) is a type of contract between a trader and a broker to try to profit from the price difference between opening and closing a position. CFDs are one of the easiest and most popular ways to trade commodities.

Investing in commodity CFDs saves you the hassle of paying for storage of commodities, in the event of physical delivery, and allows you to buy or sell without having to deal with traditional commodity exchanges, such as CME, ICE or NYMEX.

In addition, CFDs give you the opportunity to trade commodities in both directions. Regardless of whether you have a positive or negative view of commodity price forecasts, you can try to profit from bullish or bearish future price movements.

Commodity CFD trading is often commission free, as brokers make a small profit from the spreads, and traders try to profit from the general change in price.

Another good thing for you is that CFDs are a leveraged product. A margin of 10% (the number may vary depending on the commodity and the CFD broker) means, for example, that you have to deposit only 10% of the total value of the position you want to open. The rest is covered by your contract provider. In this case, if you want to make a trade of $1,000 worth of a certain commodity via CFD, and your broker requires a margin of 10%, you only have to spend $100 to open the position.

The advent of online trading has had a significant impact on the commodity futures markets. Physical trading floors have been replaced by electronic markets, giving many people around the world access to commodity futures exchanges in different parts of the world.

The American Commodity Derivatives Exchange, which began as a dairy exchange, has evolved to offer the widest range of futures and options contracts.

The oldest futures and options trading exchange in the world, operating as a subsidiary of CME Group since 2007.

The largest global physical commodity exchange in the world. The CME Group acquired NYMEX in 2008 and also operates COMEX, the world’s leading metals exchange.

An online exchange for global commodities and OTC products that started as a stock exchange specializing in energy markets.

It offers futures and options primarily on base metals.

Each individual commodity has different factors that affect its price, but there are some general factors that have always played an important role in the formation of commodity prices.

Demand from Emerging Markets: Rapidly growing economies such as China and India are seeing an increasing need for raw materials and basic commodities to feed people, build the necessary infrastructure and fuel their homes and factories. Demand from emerging markets has the greatest impact on commodity prices.

Supply: Abundant or scarce supplies of commodities may also lead to significant price movements. Environmental, labor and political issues in the major producing countries can affect the the supply of commodities which will lead to price movements.

US Dollar: While maintaining the status of the world’s reserve currency, the US dollar can also influence the direction of commodity prices. When the dollar is strong, commodity sellers get fewer dollars for their product and vice versa.

Substitutes: When the price of a particular commodity goes up, buyers try to find cheaper alternatives, cheaper aluminum may replace copper for example.

Weather conditions: Many types of commodities are highly dependent on weather conditions. A severe drought or heavy rainfall can destroy crop supplies. Storms, hurricanes and extreme cold weather may cause an increase in demand for heating, which will lead to higher prices for energy commodities such as gas and oil.

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