The commodities market is one of the most important asset classes in the world, as it influences nearly all aspects of our day to day lives. It is ideal for beginners due to its flexibility and volatility, which can bring great returns over a long period of time. Read more below and find out how you can trade them in a profitable way!
What are Commodities
Commodities are interchangeable goods that are used in manufacturing processes around the world and they are an important part of our everyday life. They can be divided into four major categories:
- Precious metals (gold, silver, copper, palladium, and platinum).
- Energy resources (natural gas, crude oil, coal, and propane).
- Agricultural – soft commodities (coffee, corn, sugar, cotton, soybeans, rice, and cocoa).
- Livestock (pork bellies, live cattle, feeder cattle, and lean hogs).
Now that you know which they are, you’ve probably identified at least 3 commodities that you use on a daily basis. The price of your morning coffee or the gas you use to drive to work every day depend on the supply and demand, as well as on the way these assets perform on the commodities market.
How to trade commodities in a profitable way
To gain access to this market, foremost, you need to register for an account with an online broker that offers commodity trading from gold and crude oil to pork bellies and coffee. These assets are an efficient way to expand and diversify your portfolio.
After you’ve opened an account, you must choose the preferred way to trade these securities. These are your options:
This is the most popular way to trade commodities and it is done through a futures contract. This contract represents the agreement to buy or sell a specific quantity from a commodity at a specified price and date.
Investing in a commodity stock means buying shares from a corporation that manufactures and sells a certain commodity or operates in an industry related to it. Let’s say you’re thinking of investing in gold, but you don’t want to invest directly in the asset. In this case, you can buy shares from mining firms, refineries, or any other companies that deal with bullion.
Exchange Traded Funds (ETFs)
Commodity ETFs work in a similar way as stocks do, the difference being that they buy physical commodities and then offer shares to traders that represent an amount of a particular asset. In this way, you can profit off the price moves without the actual risk of holding a futures contract.
Trading commodities, in any form, involves substantial risk of loss. To maximize your chances of getting profits, you can create a research-based trading plan to follow. Turn the objectives into a routine. For example, it’s extremely important to familiarize yourself with the factors that move the commodities markets and analyze them before every trade. Supply and demand, production interruptions, inflation or the weather are some of the major variables that impact commodities and you must keep an eye of them at all times.
Keeping a trading journal can also be very beneficial, as you’ll gather valuable information about the commodities you’re trading, while also learning from both your mistakes and successful trades.
Commodities Trading – Pros and Cons
Let’s start with the pros! As mentioned at the beginning of the article, this market is completely flexible, allowing you to trade 24/7. This advantage will come in handy, especially when you’re just getting started and trading isn’t your main source of income. In addition, given how volatile the market is, whether you go long or go short, the returns can be superb. TradeFW even makes it possible for you to trade with a leverage ratio of 1:10! Minimum-deposit accounts provided by the broker also control full-size contracts that you would probably not be able to afford otherwise.
Another advantage is that, unlike other securities, commodities perform well and can bring great profits when inflation is high. The assets are also more lucrative than other classes in the long run. All in all, it is the safest trading type, suitable for a beginner.
The fact that the market is so volatile can turn against you any time and cause a substantial loss of capital. The investment costs are also relatively high in comparison with other types of assets, but it mostly depends on the broker. It’s important to trade with an online firm that is transparent about the commissions it charges and the overall costs.
The Bottom Line
Commodities represent one of the most important asset classes in the world and are part of our daily life. You can trade them as futures, stocks, or ETFs – depending on your style and financial goals. The market is extremely volatile and in order to maximize your chances of gaining profits – you need to choose a reliable broker and come up with a solid trading plan. Stay focused on the reason you’re trading for and learn from every experience, this is the only way you’ll succeed in such a competitive market!