What Is Commodities Trading?

What Is Commodities Trading?

commodities

Commodity trading refers to the act of purchasing and selling natural resources. In simpler terms, it means that the parties involved trade in non-manufactured items. These are items which are cultivated from the soil or which occur naturally in the environment.

In regards to commodities trade, two main types of goods are usually involved. These are, soft commodities and hard commodities. Soft commodities refer to agricultural produce for instance wheat, barley, and livestock. Hard commodities on their part refer to metals and energy. Examples include gold, silver, gas, and electricity.

To make it easier for understanding, commodity goods can further be classified in four categories. These include:

1. Metals

Include gold, silver, platinum, and copper among others. Gold and silver are in particular more frequently traded in comparison to the other metals.

2. Energy

Includes crude oil, gasoline, natural gas, and heating oil.

3. Agricultural crops

Include wheat, rye, oats, barley, corn, rice, beans, nuts, cocoa, coffee, tea, cotton, pyrethrum, and sugarcane among others.

4. Livestock and meat

Include cattle, chicken, pigs, beef, and lean hogs among others.

A market driven by demand.

Supply and demand is key with commodities trading

Away from its definition, commodities trading is a market that is by and large driven by demand and supply. The lesser a commodity is in supply, the higher the demand for it will go and similarly its price. The reverse is true for a case of increased supply.

There are many factors which play out to influence the forces of demand and supply. One of these is the weather. Negative weather conditions such as prolonged droughts or hurricanes can lead to poor crop performance and poor harvest. This in turn translates into scarcity of agricultural commodities leading to an increased demand for them and hiked prices.

Aside from weather, other factors such as politics and economic changes can also control demand and supply.

A lucrative online trade

Although the internet has traditionally been a platform for stock trading, more and more investors are now taking to the net to sell commodity goods. Unpredictable stock markets have forced many an investor to try their luck in commodity trade.

Additionally, the online commodity market is also attractive to its low cost of operation. The cost of premises and other physical operation costs are done away with when you operate online. Furthermore, we can also unanimously agree that online trading exposes you to a wider market than you would ordinarily have.

Online commodity exchange has served to make things easier for many manufacturers. Thanks to ease of accessing sellers through the internet, they can now easily purchase raw materials and use them to maximize their productions. Examples of sites which have made commodity exchange possible are ICE, CME and NYMEX.

How commodity trading occurs

Commodity traders are commonly motivated by a single goal, to make the maximum possible profits from their sale of commodity goods. That being, most commodity traders would want to time their sales to coincide with periods of increased demand. Sellers are not alone, buyers too want to make the most out of their money. They wish to buy high quality goods but at the cheapest price possible.

Because of the conflicting yet somewhat similarly interests of the two parties involved, there has been need that a compromise be reached. This has in particular led to a form of trading known as futures. This has been a common trading method across the commodity exchange platforms.

What are futures?

Futures refers to a written contract between a seller and a buyer. In this contract, one agrees to buy or sell a given quantity of goods on a future date at a predetermined price. This kind of contract is especially popular with airline companies which have to continuously purchase fuel in large quantities. They are likely to enter such an agreement with a supply to help safeguard them against volatile fuel prices.

Futures can further be divided into two categories namely hedgers and speculators. Hedgers are the players who actively influence the prices such as suppliers and manufacturers. Speculators on the other hand may not be actively committed or involved.

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