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Commodities are physical raw materials like corn, wheat, oil, and precious metals. Buying and selling all agreements and contracts for these raw materials are referred to as commodities trading. As much as you can physically exchange these goods, a lot of the trading occurs in futures contracts. Traders agree to buy or sell the commodity at a specific price and date.
Commodity trading is where investors agree to commit funds and speculate on commodities. It shares a lot of similarities with stock trading or foreign exchange trading. Still, instead of buying and selling shares, an investor will speculate on a trade commodity to make profits. Commodities are goods that possess intrinsic value and supply consistency and can come from more than one supplier.
Trading is dependent on supply and demand because when there is a limited supply, the commodity will increase in price. A sudden increase in supply will cause the price of the commodity to fall sharply. In that way, commodity trading is affected by the level of demand and supply in the commodity market.
Market players must deal with the commodities exchange if they want to trade various commodities and agree on derivative contracts. Derivative contracts are generally agreements or tradeable contracts whose value changes according to the price of an asset and not from owning the asset itself. A commodities exchange makes it convenient to trade in commodities like gold without physically owning them. Some of the most known commodity exchanges include the New York Mercantile Exchange (NYMEX). The Chicago Mercantile Exchange (CME) has the most diverse tradable derivatives for speculation and risk management.
Commodities trade involves staking on how the price of a commodity will move. When people anticipate the prices will go up, they buy futures (long positions). When they think the price will go down, they sell futures (short positions).
Even though you can opt to purchase the physical commodity and sell it on your own, it is more common to find people trading futures contracts. The contracts have specifications on delivery dates, prices, and quantities, among other rules. Significant manufacturers and large-scale consumers often trade global commodities for risk management to shelter themselves from price fluctuations.
Trading commodities on the internet has attracted many investors to the venture recently. There is increased convenience and ease of transacting compared to traditional commodities trading. When they trade commodities online, investors do not need to contact a broker at the bourse to place an order. Everything you need as a trader is readily available in an accessible online trading account. You can use the commodity account to see all the charts you need and get all the analysis tools you need.
Online commodity trading gives an upper hand to investors because they enjoy instant delivery or settlement of trades, unlike in old times. There is no need to own paper certificates, and as a result, an investor can upgrade their trades immediately if they see a newer opportunity. Some strategies, such as scalping small price movements become a walkover.
Diversification of portfolios is much easier due to the wide variety of commodities and commodity stocks available. One secret about online commodity trading is that most have little to no correlation. You can expect prices to drift in different directions with equities. That protects you from the price shocks you would experience with trading a purely-equities portfolio. This makes it attractive for risk-avoiding traders.
Higher liquidity in the international commodities trading market gives speculators an extra edge because it draws in many trading opportunities. Liquid assets are just assets that you can easily buy and sell without queuing orders for a long time. Therefore, all the futures contracts fall within the liquid assets category.
The most direct form of investing in a commodity is to purchase the commodity physically. It is the oldest form of commodities investment. You can sell physical goods at a good bargain whenever you no longer find them useful. However, it carries many logistical challenges because you need to plan for storage and safe delivery.
One such trick is to buy gold by looking for a coin dealer. The coin dealers have gold coins and bars available in different sizes, quality, and rarity. Most have the years they were minted, and rare coins will attract higher prices.
Due to the sizes, you can get gold coins with many conveniences compared to most commodities. On the same note, a gold coin is relatively easy to move around with you. However, some commodities, such as beef cattle, crude oil, and bags of corn, are bulky and inconvenient. Individual investors will need help to transport most other physical commodities.
Buying futures contracts needs an investor to have capital. You can deposit margin requirements in your online brokerage account and trade as soon as opportunities come. The margin requirements are small, so trades carry more risk than trading stocks.
An indirect yet simple way to invest in commodities is to buy stocks in companies that mine these commodities. You could buy energy or metal stocks from companies like Glencore (oil, gas and coal) or AngloGold (gold and platinum). The prices of these company stocks do not directly fluctuate with the commodity prices.
Some investment funds offer exposure to commodities. You can trade in these ETFs to avoid holding the commodities. The investment funds invest in the commodities, stocks of the commodities or a mixture of both.
Good examples of these investment funds include the SPDR Gold Trust ETF ($GLD), available on the NYSE. Investors who want to place bullish bets on oil prices would want to invest in the United States Oil Fund ($USO).
Some funds also offer investment opportunities in a cluster of different commodities. The iShares S&P provides a commodity-indexed trust, a fund benchmark containing 24 various commodities in a list of spread-out sectors.
When trading commodities from home, you do not have to deal with all the chaos traditional floor trading has. You can trade right from your home computer or tablet. The convenience and transparency make it possible to even trade while on the move.
Brokerages are to thank for most of the convenience experienced in the last few years. Brokerages are responsible for providing cutting-edge commodity trading platform technologies with the right trading tools for investors. The trading platforms provide real-time analytics and technical education all from one place.
You, however, need to get a good trading broker who will offer you the right tools at affordable commissions. State-of-the-art platforms and easy access to them will ensure that you can make timely decisions and take advantage of opportunities. Whenever you have a diligent broker, you will get regular correspondence on technical updates that will improve your trading experience. For example, you will get emails introducing you to updates on the platform or adding new instruments you may be interested in.
A good commodity trading company ensures you have the right customer support from its platform, including live chat or social trading. The infrastructure also needs to have minimal lags or slippage.
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With so many stakeholders involved in the market, there needs to be one unifying place where they can all interact conveniently. Commodity trading is done through software platforms that enable all farmers, producers, investors, and analysts to communicate in one place, all online. Your commodity broker provides a downloadable commodity trading platform where you can trade in a transparent, secure, and controlled environment.
Traders must deal with licensed brokers to ensure they invest with a reliable and accountable entity. Some of the parameters you need to consider when rating a trading platform include:
A state-of-the-art commodity trading platform should bare the reputation of the financial institution providing it. In other words, if there are a lot of slippages, security breaches and loopholes, it means that the commodity broker is not trustworthy. Aside from being licensed, a broker should also insure the investments you make on their platform. Platform security is an essential aspect of trading because a website needs to meet all the security credentials, such as SSL certification, to ensure that only you can access the platform at any point. It keeps away URL intruders.
Being able to make deposits or withdraw your earnings are important for a commodity trading platform. It will help you make urgent trade decisions without any challenges resulting from cash balance delays. You also get to withdraw your cash and finance your spending as planned.
Commodity trading is a high-stakes type of trading. For that reason, you need a platform that lets you place your trades and gives you timely fundamental and analytical information. In commodity trading, information and how fast you can get it can make a big financial difference.
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