FxBrokerReviews.org – Commodity trading is a very common term these days for investors. It is considered to be one of the most developing forms of trading, especially among beginners. There is a wide range of commodities today like metals, precious jewels, natural gas, oil, and a lot more that can be traded worldwide.
Commodity trading for beginners is a good way to diversify their portfolios apart from traditional securities and financial instruments. For investors trading in commodities is often shown to give high returns in the long run due to the changing prices of the commodities.
Earlier, it was said to be a complex form of trading as the commodities tend to move in opposition to stocks and require a brief knowledge about the volatility of the market, but with various online commodity trading platforms, it has become easy to access the market and buy and sell various commodities. Before you make your first commodity trade here is a full guide on how to trade commodities online, the best commodity trading platforms, and more:
What are commodities?
In simple terms commodity in commerce refers to a good that can be exchanged with another good for trade or buying and selling. Examples of commodities can be oil, sugar, metals, natural gas, and more.
The supply and demand principle of the market is one of the main factors that drive the exchange of commodities. Any disruptions in the supply-demand chain majorly affect the rise and fall of the trade. Apart from it global, economic, and political conditions also drive the force of commodity trading.
Read below to get a deep understanding of the market and how to trade commodities online.
What is commodity trading?
Commodity trading is similar to stocks, where you buy and sell stocks as per the price moves to get profits. Similarly, while trading commodities you earn profits by exchanging commodities. Commodity trading for beginners is made easier by trading through CFDs that capitalize on the price movements without the ownership responsibility of the underlying security. The trading is done globally, while some exchanges have merged into big institutions to carry out and regulate the exchanges like the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX) in the US, and the London Metal Exchange (LME) in Europe.
What are the types of commodities that you can trade?
Commodities are divided into four categories based on their type and nature. So if you have not decided on what commodity to trade take a look at the categories ;
- Metal commodities
- Agricultural or Nature commodities
- Energy commodities
- Environmental commodities and others
As the name suggests metal commodities include metals like gold, silver, copper, aluminum, platinum, and the like. Amongst all the metals gold is considered to be the most popularly traded commodity worldwide.
Investors during a period of bear market consider investing in metals and precious jewels as they are reliable and promise returns, especially gold.
Agricultural or Nature Commodities
Investors who are interested in the agricultural sector trade nature commodities like crops, pulses, corn, and even livestock. Any change related to the weather condition adversely affects the prices of these commodities. For example, during winters, the trade in summer crops might witness a downfall and vice-versa.
Energy sources that power up the economy like fuel, electricity, oil, natural gas, and the like come under this category. Trading in energy commodities is considered a little risky as compared to other commodities as one has to be aware of the economic changes and have knowledge about the new advances in all energy resources.
Environmental commodities consist of all renewable energy certificates, white certificates, and carbon emissions. They usually take the form of non-tangible energy credits. The value of these credits is derived from the needs of the trades and business organizations to produce and consume cleaner forms of energy.
How to trade commodities online?
As mentioned above, trading commodities is quite similar to trading stocks in the market. For a beginner, before you start trading it is important to know the market, register yourself with an online commodities trading platform have a trading strategy and then execute your trades. Below we have assembled a step-by-step guide on how to start trading commodities:
- Market research
The most important step before you get into trading is market research. Identify the type of commodity you want to trade, and understand the situation and volatility of the market. Once you think you understand the market only then move on to the next step;
- Select a broker
The next step is to select a broker that is regulated and reliable. A broker plays a very crucial role in making trade decisions and educating you about the market. If you are a beginner then you should look for a broker that has a lot of educational tools and techniques to ease the trade process. Find out here about the best commodities trading platform.
- Open an account and make a deposit
Opening an account is an easy process, you need to fill in all the necessary details like income, occupation, financial conditions, and the like. Once you have completed the registration process, make an initial minimum deposit with the broker. In case you are unsure, you can even start by opening a demo account, provided by most online commodities trading platforms.
- Find a trading strategy
Having a trading plan is always a good idea for beginners as it enables them to understand the market first. If you are not familiar with the changes in the market and trade without a strategy, the outcome can be risky for you.
How does commodities trading work?
If you feel that trading commodities are only limited to an exchange of various commodities then here is what you need to know! There are four other ways in which you can trade commodities. Read further to know more:
Use Futures to invest in commodities
A futures contract allows one to buy or sell commodities at a pre-decided price which is set at a future date. It is a legally binding contract signed between both the buyer and seller. All commodities can be traded under futures contracts, as long as you have a valid brokerage account.
There are several advantages while you are trading with futures, it is easier to take long or short positions in the future market as it is a play of the underlying commodity. You will find two types of investors in the futures markets for commodities: commercial investors and institutional investors. Futures contracts are more common in institutions involved in commodities rather than in individuals.
Use stocks to invest in commodities
Investing in stocks is another way of trading commodities. If you want to buy an energy commodity you can invest in the stocks of the energy company, rather than buying the commodity. The stock price will closely follow the price of energy. If you invest in commodities through direct stocks, you can make profits even if the price of the commodity is not doing well in the market.
A trader can invest in metal stocks, energy stocks, crop stocks, and even meat or livestock stocks.
Use Mutual funds and EFTs to invest in commodities
Based on what commodity you want there are several ETFs and mutual funds that you can trade-in. ETFs allow traders to gain profit in case of any fluctuations in commodity prices without investing directly in futures contracts.
For example, if you want exposure to gold or silver, you can invest in gold or silver ETFs. There are no purity or storage-related issues with ETFs as the units are held electronically in your account.
Use Direct Investment
If you don’t want to trade in commodities through stocks, mutual funds, or even EFTs you can go for direct investment. You can directly invest in gold or silver virtually or either in the form of coins and jewelry. Although direct investment can have high transaction charges as well as storage charges.
How commodities are priced in the market?
Like trading other financial instruments, various factors move the price of commodities.
- Demand and Supply
The chain of demand and supply affects the prices of the commodities. This is how it affects the price: when for a particular commodity the buyers are more than the number of sellers the price of the commodity increases and when sellers outnumber buyers, the prices go down.
- Geopolitical factors
Geo-political here refers to the political stability of a country. For instance, if you are investing in crude oil, then instability in any one of the Organization of Petroleum Exporting Countries (OPEC) can affect the price of crude oil.
- Economic conditions
The economic conditions of a country can depend on factors like recession, unemployment, interest rates, and more. The price of the commodity can rise and fall accordingly, depending on these factors.
- Speculator trading
Speculators are the people who enter the commodities markets with the primary aim of gaining profits from the variations in the price without taking physical possession of the underlying commodity. If there are too many eyes or speculations on the commodity then the chances of the price increase are more and vice versa.
How do commodities affect the stock market?
The commodity market has a huge impact on the stock market. As commodities take up an important place in commerce as well as the trading market any changes in the price show a significant change in the stock market. Data shows that even a 10% rise in the price of a commodity leads to a rise in the stocks of the company that produces or manufactures the commodity.
But this is only from the manufacturing perspective. The impact of commodity prices on industries is entirely different. An increase in commodity prices also increases the cost of production, which drives the profits down, leaving very little for equity shareholders. It drives the equity market down.
What commodities to invest in 2022?
While there are a variety of commodities to trade from, if you are a beginner it might seem to be a little confusing to choose the commodity which will get you good returns. We at forex broker reviews have researched the market and listed the best commodity trading for beginners
- Brent crude oil
Crude oil is one commodity that is going to top the charts for a long time. It is the most traded commodity all over the world. Brent crude oil is a light oil that is easy to refine into an end product.
Like all other commodities crude oil also hugely depends on the political situation of OPEC and the market demand and supply.
Gold is considered to be the safest asset to invest in. It has good returns, is reliable, and tends to hold its price in times of economic rise or fall in the country. Traders can invest in gold as jewelry, as coins, or hold gold virtually.
As compared to previous years Global silver consumption has increased by 15.29 percent year over year to 1033.10 million ounces in 2021. According to The Silver Institute, the trade of silver has shown an 8.20% increase when compared to a 9.98 % decline the previous year. Factors like economic conditions and strong manufacturing of silver have kept the trade of silver afloat in the market.
There is a forecast that shows a rise in the value of aluminum in the market. With most countries taking an initiative toward a green economy, aluminum plays a crucial role as a commodity in providing for the same.
What are the best commodities trading platforms?
Here is a list of the best online commodity trading commodity trading platforms that you can consider before investing ;
- Capital.com – Best for speculating on commodity Futures.
- CMC Markets – Trading platform with Low Minimum Deposit
- NAGA – Commodity Trading platform with best copy trading feature
- Pepperstone – Best Commodities trading platform for Beginners
- IG Markets – Best Commodity Trading platform with most informative resources
- Interactive Brokers – Commodity Trading Platform with the lowest Trading Fees
- Saxo Markets – Best Commodity Trading Broker with tight Spreads
- Plus500 – Commodity platform for mobile trading
You can visit Forex Broker Reviews for detailed reviews of the following platforms and more!
Trading commodities is a safe and good option if you are beginner. The biggest advantage of trading in commodities is that you can either make direct investments or make trades through mutual funds, EFTs, Stocks and Futures. The most popular and reliable commodity to trade in Gold.