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Commodities
A commodity is a raw material or economic good such as copper or coffee which can be bought and sold. All units of production are identical, regardless of who produces them.
Commodities are often used as inputs in the production of goods and services. The quality may differ slightly, but they are essentially the same across all producers which economists call being fungible. When traded on an exchange, a commodity must meet a minimum standard called the basis grade, so a trader can be certain they are trading equivalent assets without the need to inspect them or know where they were produced.
Commodity Categories
There are 4 broad categories in which commodities can be classed:
1) Metals: during times of uncertainty and volatility or bear markets (a prolonged drop in financial asset prices, usually happens when a broad market index drops by 20% or more), some investors decide to invest in precious metals, particularly gold, because of its status as a global store of value.
2) Energy: traders who wish to enter the energy sector in the commodities market may consider economic changes, shifts in oil production from OPEC, and new technological advances in renewable energy, since they can all have huge effects on energy market prices.
3) Agriculture (corn, soybeans, wheat etc): traders who wish to enter the agricultural sector might consider analysing population growth (rapid increases in growth will increase demand) and anything else which could affect agricultural supply such as seasonality and weather-related transitions.
4) Livestock and meat: this category falls under agriculture as well with similar factors affecting production.
Sometimes people will refer to commodities as ‘hard’ and ‘soft’.
Hard commodities include natural resources that must be extracted or mined such as oil, silver, copper.
Soft commodities include wheat, corn, coffee, livestock and so on.
Trading Commodities
Spot Market
The prices in a spot market reflect the current price at which a given asset (such as a commodity or currency) can be bought or sold for immediate delivery. In contrast to the spot price, we will briefly mention the futures price which you may have heard before, this is simply the agreed-upon price for future delivery of the asset in question. We talk about the futures market below.
For immediate delivery of a commodity, you would head over to the commodities spot market and exchange cash for delivery of the commodity you require. For example, during the height of COVID, McDonald's stopped buying potatoes from UK farms which left farmers with reduced demand and stock inventory they needed to get rid of before it spoiled. Many farmers would go to the spot market to try and sell them. On our platform you are only trading in spread bets and CFDs which are derivatives (they match the price movements of the underlying asset), so you will not receive delivery of the commodity.
Futures Market
The commodities futures market is where buyers and sellers agree to exchange a specific quantity of an asset at a certain price today, on a certain date in the future. The actual assets aren't being traded, rather contracts to purchase or sell the assets are being traded between market participants.
This is useful because it means we can speculate on the price of the asset and make money on the movement in price without having to own them. So as traders we can trade the price of metal, energy, and agricultural commodities without having to own the asset and without any physical exchange. It would be a problem if you were trading corn and every time you bought on the market you would receive a delivery!
Often futures contracts are used by companies to lock in the price of a certain commodity for exchange at a future date, this mitigates the risk of their costs of production increasing in the mid to long-term – this is called hedging your risk. The two primary uses of commodities futures are speculation and hedging. When trading with us you will be speculating on prices.
Participants in Commodity Derivatives
- Buyers and Producers: these market participants buy or sell futures contracts intending to receive or deliver the physical asset once the contract expires. They use futures contracts as a form of insurance to lock in prices for future delivery or purchase, ensuring price stability and predictability. In a way they can be a type of hedger.
- Speculators: these market participants trade commodities with the sole intention to generate a profit from large swings in price (volatility). Speculators never intend to take or make delivery of the physical asset in question so will not hold the contract till expiry.
- Hedgers: market participants who use commodities futures contracts to manage or mitigate the risks associated with price fluctuations in other securities they hold. They do not intend to take delivery in this instance.
Forex: What is it and how to trade it?
Foreign exchange, also known as forex or FX, is the global market for buying, selling, and exchanging currencies. It is the largest and most liquid financial market in the world, with trillions of dollars traded daily. The foreign exchange market allows businesses, investors, and individuals to exchange currencies for various purposes, including international trade, tourism, and investment.
