If you are considering trading in commodities, the most important thing to do is take the time to educate yourself on commodities trading. Like any other form of trading, commodities trading can involve many risks that can be catastrophic to your bank account if not done right. There are things experienced traders know that may be new to novice traders. This deep knowledge and understanding come from experience in trading.
When learning how to trade commodities, you need to start from understanding the basics of commodities trading. Once you understand what commodities trading is all about, you can learn helpful strategies that can help you in the trading process. Here is everything you need to know about trading commodities.
What are commodities?
In financial trading, commodities are physical assets with inherent physical worth. They can include raw material used by people in their day-to-day lives, such as energy resources, construction tools like metals and agricultural products. The commodities market can be made of physical trading derivatives that use options, futures, and forward contracts. The futures market was created to solve a need for commercial traders. Future markets give traders the possibility of planning the selling and buying of commodities for a specified price on a future date.
Generally, commodities can be divided into two categories:
- Hard commodities
- Soft commodities
Hard commodities comprise mined products such as silver, oil, and gold, while soft commodities are comprised of agricultural products like wheat, coffee, cotton, sugar, and cocoa. All these are commodities that are vital elements in the global economy.
As a trader in Singapore, the best commodities to trade include sugar, gold, silver, crude oil, Natural gas, corn, Brent oil, Cotton, wheat, and coffee. If you do not have the necessary funds to trade commodities directly, you can ask your Singapore broker for CFDs on commodities. This gives you a platform to predict some of the most traded commodities worldwide as you take advantage of the market volatility while trading CFDs. It is also possible to access the commodity market indirectly through trading stocks.
How commodity trading works
To better understand how commodity trading works, here is an example.
A cotton farmer decides to protect themselves from future price volatility and potential loss in harvest time. This farmer can make use of the futures market on cotton to hedge out future risks. As it is with farming, the farmer has costs associated with producing and cultivating cotton. To cover all these costs and even make a profit, he requires certainty concerning the future price rates of cotton. Because the crop will be ready to sell in a year, commodity trading makes it possible for the farmer to secure the cotton cost in the present time. This can be done by selling a cotton future contract at a specific price for delivery at a specific time in the future. This way, the farmer can negotiate a price they deem to be favorable to cover the present costs of farming and the preferred profit margin. Through this future contract, the farmer is guaranteed to sell the produce and making his money.
The benefits of commodity trading
There are numerous benefits associated with trading commodities.
When you trade commodities, you can diversify your portfolio to include trading real assets. The return you get from trading commodities has low correlations with the returns of trading major asset classes. Therefore, when stocks and bonds fail, commodities usually rise. Having a diversified portfolio with low asset correlation usually has less volatile returns.
Protection from inflation
In commodities trading, commodities maintain the price and value, even during a high inflation period. In such a volatile trading environment, you can turn to hard assets like precious metals to secure your funds. Whenever there is inflation, people look to invest in commodities, especially gold, to secure their investment.
The commodities market is highly volatile. This means that there can be huge swings in the prices. As a smart investor, you can take advantage of these swings to make money. A well-planned commodities investment can produce high returns.