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In-depth guide on how are commodities traded

how are commodities traded
A commodity is a product traded in large quantities. These products can be agricultural products or natural resources. The companies that produce these product sells them to companies that use them. Along with real estate, bonds, and stocks, commodities are part of investment asset classes.

What do you know about trading commodities? This article will explore everything about commodities markets and how you can trade commodities in the commodity market. You can be part of the commodities market, even if today is the first time you hear about it.

What are commodities?

Commodities occur naturally; they are goods or materials collected and processed for human usage. There are various commodities, which includes precious metals, sugar, oil natural gas, etc. Commodities form the basis of any economy because raw materials are essential for producing energy, clothing, and food. Today, to cut costs, commodities are mass-produced and standardized for quantity and quality. This means regardless of who produced these commodities, the price remains the same.

You can buy and sell commodities on exchanges. Today, there are several commodities exchanges where you can trade commodities. These include the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), the Minneapolis Grain Exchange, and the London Metal Exchange (LME). The most traded commodities include cotton, corn, natural gas, crude oil, and wheat.

What are Commodity Derivatives?

Commodity derivatives are exchange-traded funds or OTC such as swaps, forwards, and commodity futures, with the underlying asset being a non-financial commodity. The underlying asset include metals (gold, silver), energy products (natural gas, oil), and agro products (wheat, coffee).

What are Commodities Exchange?

Commodity exchanges represent an organized and regulated financial market that facilitates the buying and selling of standardized futures contracts, whose values are connected to the commodity price. Nowadays, commodity exchanges are available throughout the world. Some of these exchanges are located in Europe, Asia, Australia, Africa, and the Americas. However, the commodity futures trading commission regulates the options and futures markets.

Potential Advantages of Commodity Exchanges

Commodity exchange creates a formalized process for the selling and buying of commodities. They provide the following potential advantages:

  • Liquidity - Commodities exchanges allow suppliers and producers to buy and sell raw materials by providing liquidity. Liquidity refers to trading volume in commodity trading.
  • Efficiency and Transparency - The price process allows market participants to see and trade prices instantly, which creates efficiency in the market.

How does the commodity Market Work?

The commodities trading market function in a similar manner as other markets. It is a virtual space, where anyone can sell, buy, or trade various commodities at a future date. However, you can also trade commodities through a futures contract. A futures contract represents an agreement between the seller and buyer; the buyer promises to pay the stipulated fee when the seller delivers the commodity at a predetermined date in the future.

People who can trade in the commodities markets include:

  • Speculators and investors
  • Miners and farmers who produce goods
  • Consumers and strategic users
  • Businesses that use or buy goods
There are different examples of commodities trading. For instance, a farmer can decide to pre-sell his agricultural products. He gets a contract for selling the particular commodity to the buyer at a predetermined price on a specified date. With this, the seller won't become bankrupt if the product price declines when he plants it and is ready to send the product to the market.

Alternatively, an airline decides to buy crude oil using a futures contract at a fixed price. It allows the airline company to avoid sudden changes in market prices of natural gas or crude oil. Another example of commodity market trading is a company that buys raw coffee for its coffee shop. The company can use this in the future to produce branded coffee. Here, the company buys the coffee at today's price, thereby making the cost of producing the branded coffee stable.

Categories of Commodities to Trade

There are over 35 commodities you can trade that are linked to commodity ETF and stocks. You can trade hard commodities and soft commodities.

Hard commodities are natural resources extracted or mined from the earth. These include natural gas, copper, crude oil, and gold. However, soft commodities are commodities grown and harvested. Examples of these commodities include lumber, wheat, coffee, cattle, and hogs. Besides this, commodities are divided into different categories based on the processes or purposed involved in their production. Let's look at these categories.

  • Agricultural commodities: These are grown for human consumption, such as coffee and sugar. They can also be used as building or clothing materials.
  • Energy Commodities: They represent traditional energy sources such as heating oil, gasoline, and crude oil.
  • Precious Metals: These are mined, such as palladium, gold silver, and copper.
  • Livestock and Meat: They are reared for human consumption and differs from agricultural products because they are not harvested.

Trading Commodity ETFs and Stocks

ETFs are investment financial instruments that hold a basket of assets, such as stocks and commodities. Some commodity efts will hold any physical assets you invest in. For instance, a gold ETF will hold a particular amount of gold coin or bullion. Selling and buying ETFs is a way of gaining exposure to the different physical commodity.

On the other hand, commodity stocks allow you to get indirect exposure to financial markets by selling and buying companies shares involved in the mining, extraction, and harvesting of any commodity product. The connection between a stock and a commodity is variable.

Therefore, it is imperative to conduct your market research because some commodity price moves in opposition to stock prices. Due to this, investors see commodity stock as a way of hedging their portfolios. For instance, if there is a shortage of oil supply, oil companies will suffer in the short term. However, when the oil price rises, the demand will outstrip the supply.

Factors that Influences commodity prices

In trading commodities, you need to understand what influences commodity prices. Commodities prices move because of supply and demand. Additionally, other factors can affect major traded commodities.

1.      Competition

The introduction of alternative goods and technologies has reduced the demand for older commodities. For instance, the advent of renewable energies has greatly reduced investment in crude oil and natural gas. Today, new companies can also influence the commodity market, especially those that provide faster production and supply chain lines. Interestingly, they will lower costs and become more appealing to shareholders.

2.      Politics

Political policies and events can negatively or positively affect commodity prices if there is an impact on imports and exports. For instance, an increase in import duty would drive oil prices. Additionally, the Middle East crises also affect oil prices as there may be a decline in oil production. Furthermore, oil prices can be influenced by petroleum exporting countries such as Iran.

3.      Macroeconomics

Major commodities get lower demand when there is a weak economy. It frequently happens with commodities that require building and transporting. However, a booming economy increases the demand and can lead to higher commodities prices.

4.      Seasonality

Agricultural products depend on seasonal cycles, which impact their production and harvesting.  Whenever harvest predictions are positive, prices tend to rise; however, a market flooded with products leads to a decline after harvesting.

CFDs Commodity Trading

You may begin trading commodities with CFDs for the following reasons.

  • To hedge your portfolio
  • leverage your exposure
  • You want to go long or short - trading falling and rising markets.
  • To take shorter-term positions.
  • When you are interested in speculating the commodities price
  • Trading without owning the underlying asset
Remember, CFDs are complex instruments, and you risk losing money rapidly because of leverage. Therefore, before opening a trading account, you need to consider if you can withstand the high risk of losing money rapidly due to market volatility and poor risk management. Importantly, it is not the obligation of PrimeFin to decide what exchange-traded funds to trade in the commodities market.

Commodity Trading with PrimeFin

PrimeFin allows you to have access to the commodity market to trade agricultural commodities and Futures contracts. We are the best futures exchange to trade commodities. Here are a few reasons investors choose us for their exchange-traded commodity.

  • More than 20 CFDs on commodity assets. You have access to the most traded commodities that allows you to diversify your portfolio.
  • We provide adjustable spreads with no commission. The spread on gold silver, gas, copper, platinum, etc., is the best in the industry.
  • A wide variety of assets such as energies, industrial metals, precious metals allows you to decrease or balance your portfolio through diversification.
To start trading exchange-traded fund, you need to create retail investor accounts. Your trading account allows you to trade any commodity of your choice. However, you need to register by filling the account opening form that includes your name, email, phone number, and password. Once you click the "Create an Account" button, your commodity trading account will be activated.

Why Trade with PrimeFin

PrimeFin is one of the leading commodity exchange platforms that allows you to trade different physical commodities in the financial market. We have a track record of providing relevant trading tools and materials for our customers. Here are a few reasons many trade with PrimeFin.

  • Regulation: We are regulated to offer trading services to different financial asset investors.
  • Education Guide:  We have diverse educational content and resources for your trading.
  • Mobile Trading: You can trade anywhere you are. It doesn't matter if you are far away from your laptop; you can still trade. 
  • Deposit and withdrawal option: We have a range of deposit and withdrawal options. Whether you want to fund your trading account via credit/debit card or bank transfer, we have got your back. Also, withdrawing your fund is very simple.
  • Trading Instruments: If you want to spread your portfolio by trading other financial instruments like commodities derivatives, iron, indices, or metal, we have you covered. We have more than 350 tradable assets listed on our platform. 

Frequently Asked Questions

What are the benefits of commodity futures trading?

Some of the potential advantages of trading commodities include transparency, diversification, protection against inflation, volatility, and hedging against risky geopolitical events.

How do I start trading commodities?

Commodity markets involve different kinds of risks. To start trading, you need to open and fund an account with a reliable broker like PrimeFin. Decide the particular commodity market to trade; decide to sell or buy and enter a trade size. Furthermore, manage your risk and monitor your position.

What is the minimum amount to start commodity trading in South Africa?

You can start commodity trading with PrimeFin with as low as Rs. 5,000. To start, you need money for margins payable upfront to the exchange.

What commodities are traded?

There are several commodity markets where you can trade natural gas, copper, cotton, wheat, gold, coffee, and crude oil. You can speculate on different commodity-linked ETFs and stocks.

Conclusion

Both new and experienced traders have several options when investing in financial instruments to access the commodity market. Although commodity futures contracts offer a direct way for investors to take advantage of price movements, it comes with several risks.

Basically, commodities are risky investments because they are influenced by various factors such as epidemics, unusual weather patterns, political events, and seasonality.
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