Commodities are often used in commerce, as they are interchangeable and are used to produce a variety of finished goods.
Commodities can be traded, known as commodities trading and includes either selling and/or buying commodities in financial markets. They are dissimilar from securities like bonds and stocks, which exist as financial contracts.
Commodities that are commonly traded are usually classified in the following broad categories: agriculture, meat and livestock, energy and metals. Let’s discuss these categories below.
Types of Commodities
Agriculture. These commodities include sugar, cotton, coffee, rice, wheat and corn. Investors interested in this particular sector should keep in mind that grains can be volatile during the summer months.
Livestock and Meat. As the name suggests, this includes all live animals, and the most common ones include poultry and cattle.
Energy. Commodities under this category include coal, natural gas, oil and even uranium. It also includes renewable energy forms like solar power and wind power.
Metals. Commodity metals include industrial metals like zinc, aluminum, copper and iron ore, as well as precious metals like platinum, silver and gold.
The prices of commodities shift as their demand and supply changes around the globe. Investors involved in the commodity market aim to decrease risk through diversification and gain profits from supply and demand trends by adding different asset classes to their portfolios.
Commodities are a good way to diversify an investor’s portfolio, beyond traditional securities. This is because commodity prices usually move in opposition to stocks. There are various ways to invest in commodities, including through exchange traded funds, options and futures contracts.
It should be noted though that commodities are known to be risky investment propositions as their demand and supply is influenced by uncertainties that are difficult to forecast, like epidemics, human-made and natural disasters and unusual weather patterns.
So, what is commodities trading?
This term refers to the exchange of different assets, based on the price of an underlying physical commodity. While trading commodities is a profession that dates back centuries, commodities are still today actively being exchanged around the globe. A commodity exchange refers to legal entities established to enforce rules for standardized commodity contract trading, as well as a physical location where commodities trading occurs.
In the recent past, some commodities exchanges have gone out of business or merged. While some exchanges specialize in one commodity category, most carry different commodities. A good example of exchanges would be the London Metal Exchange, which only deals with metals; the New York Mercantile Exchange and the Chicago Mercantile Exchange.
Currently, investors can trade commodities at any time of the day during the workweek on the international market.
How can one trade commodities?
There are a few ways investors can trade commodities in their portfolios. These include:
Commodities futures. Buying and selling contracts on a futures exchange is the most popular way to trade commodities. It involves entering into an agreement with another investor, based on a commodity’s future price. Investors interested in futures trading must open an account with a brokerage account provider that is specialized in and provides futures contracts. Futures trading accounts will enable access to these markets.
Commodities stocks. Investors can also purchase stocks of the company involved with a commodity. These stock investments follow the price of an underlying commodity. This has less risk, compared to investing directly in commodities.
Physical commodity purchases. Trading futures contracts doesn’t involve the physical sale and purchase of the commodity. However, for precious metals, investors can physically purchase them and take possession of the metal.These types of investments afford an investor exposure to precious metals like silver and gold. It should be noted though that physical commodity purchases are best suited for value-dense commodities like platinum, silver or gold.
Commodity pools and managed futures. These are private funds that can invest in commodities. However, most of them aren’t publicly traded, so an investor may require approval to buy into the fund. These private funds sometimes use complex trading strategies to increase the probability of higher returns.
Commodities ETNs, mutual funds and ETFs. There are exchange traded notes (ETNs), exchange traded funds (ETFs) and mutual funds based on commodities. With the latter, funds may be invested in the stock of companies with commodity exposure or futures contracts can be purchased to track commodity prices.ETFs and ETNs allow investors to profit from the price fluctuation of commodities without having to directly invest in futures contracts. Investors interested in ETFs and ETNs don’t require special brokerage accounts to participate in the market.
Commodities trading is best suited for sophisticated investors who understand commodity price charts and have done extensive research. This is mainly because commodities can be affected by uncertainties that aren’t easily predictable. Investors who are on the fence may benefit from research and/or investments with less risk that still offer adequate opportunities for commodities exposure. You are advised to speak to your financial advisor or an Accuindex representative before making a decision to invest or at least get assistance on the best strategies to use in the market.
High-Risk Investment Warning: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial adviser if you have any doubts.