What is a commodity? If you’ve got to grips with stock trading and you’re hungry for more market knowledge, this might be a question on your mind.
Commodities are an asset class. They are technically any tangible resource that can be bought and sold easily – think gold, corn, or crude oil. Trading commodities is like trading stocks, especially since many of them have predictable trajectories Looking for a day trading platform that is legit? Check out The Investors Centre to find the best Forex brokers in the UK for secure and reliable trading!.
But the commodity world is rich with nuance and opportunity, so it’s worth learning more before you get started.
Choosing commodities
Commodity markets range immensely. From assets like property, jewellery and pure gold, which can be widely and quickly sold, to more illiquid options like lumber and livestock, you’ll need to choose your investments first.
Typically, it’s advised for beginners to go for liquid assets. This lowers your risk of having trouble entering or leaving market positions and improves the stability of your profit / loss balance. If you’re thinking about commodity trading for the first time, you should get familiar with the market first.
How to trade commodities
Commodities can be traded in various ways. These include:
- Exchange-traded funds (ETFs): These are funds that invest in commodities and can be used to diversity a portfolio.
They are both bought and sold through a stock exchange. You can buy an ETF to track a currency, an entire sector, or stocks from another country. Most physical ETF contracts are settled with cash.
- Futures: Some of the most used products, futures are effectively tools used by cautious traders. They help to hedge against risk by locking in pricing trends. For example, traders can buy crude oil futures and in doing so hedge an upcoming rise in fuel prices.
- Options: These refer to a type of contract giving traders the right to buy or sell a set amount of a commodity at an agreed price, before a deadline expiry date. This is not an obligation, but if the buyer decides to trade the commodity, they can profit as prices fluctuate without needing to physically take on the commodity.
What influences commodity prices?
Globally, there are many factors at play that influence and determine the price of commodities. Supply and demand are the most prominent, causing price fluctuations as investors pick and choose.
Other key factors driving price trends include:
- Geopolitical events
- Weather conditions
- Transport and storage costs
- Economic development
- Natural disasters
Planning your trades involves navigating these external factors and forecasting too. If there are upcoming elections in a country of interest, proceed with caution.
Developing a trading strategy
You’ll need to create a trading strategy specific to commodities, learning the unique elements of commodity risk management. Don’t be tempted to make rash decisions based on the value of leading commodities alone.
As always in trading, market research makes or breaks a strategy. Know what you’re buying into before you sign any paperwork. Talk to experienced traders to find out what works for them, and if your skills align, their strategy could be worth a try.
Start commodity trading today
If you’re ready to dive straight in, commodity trading could introduce you to a world of opportunity away from stocks and shares.
Many commodities make a worthy addition for both active traders seeking new strategies and passive investors looking for a backup plan during periods of volatility on the stock market.
If you want to trade without owning the underlying asset, commodities are a great place to start.
