What is commodity trading?

What is a Commodity?

Commodities affect our daily lives; they are raw and unprocessed materials used to make consumer goods.

Major categories include:

Energy Crude oil, gasoline, heating oil, natural gas
Grains Corn, soybeans, soybean meal, soybean oil, wheat
Livestock Feeder cattle, live cattle, lean hogs
Metals Copper, gold, palladium, platinum, silver
Softs Sugar, cotton, cocoa, coffee
Others Lumber

Who trades Commodities?

What is commodity trading?

As mentioned in the above section, commodities affect the lives of everyone on a daily basis, and as such, we are all effectively participants in the commodity market – supply and demand! However, in the pure sense of the word, there are two main types of commodities traders:

Commercials

The businessmen that are directly involved in the production, processing, transportation and handling of commodities.

Speculators

Banks, hedge funds and individual traders who speculate on the price of commodities in order to make profits

Commodity Markets

Commodity markets are like any other financial markets. It can be a physical or virtual place where traders can buy and sell different types of commodities. While there was an increase of commodity markets around the world in the late 20th century, in this century, the number of commodity exchanges has somehow stagnated. The most important commodity markets nowadays are:

Chicago Mercantile Exchange (CME) Crude oil, natural gas, ethanol, gold, silver, copper, platinum, palladium, corn, wheat, soybeans, live cattle, lean hogs
Intercontinental Exchange (ICE) Crude oil, gas oil, natural gas; cocoa, coffee, cotton, sugar
Shanghai Futures Exchange (SHFE) Fuel oil, gold, copper, aluminium, zinc; rubber

How to trade commodity?

How to trade commodity?

Commodities can be traded in spot or futures markets. Commercials, who we already described in the above section are the ones dealing in spot markets, which is associated with real-time prices. This means that the commercials are paying the actual price of the commodities in and in return get immediate delivery.

On the other hand, speculators or traders involved in online trading are not actually buying or selling commodities, but are only speculating whether their values are going to increase or decrease. That is to say that, if you buy $100 worth of gold with an online broker, you cannot later claim your gold with the broker!

The prices of commodities traded in futures markets are very volatile and fluctuate a lot. Online traders aim to buy commodities at a low price and sell them at a higher price in order to make a profit.