Types of Commodities
By commodities, of course, we mean exchange goods that meet specific standards and are traded on an exchange. A commodity usually refers to raw materials as opposed to off-the-shelf products, or, in other words, finished goods. Ever heard of commodity futures? That is what they use on an exchange to buy and sell commodities. It is basically an agreement to buy/sell a specific amount of commodities on a specific date in the future at a particular price. Futures contracts also include commodity quality, grade, and delivery specifications. So, your basic, run-of-the-mill characteristics you need to make an informed investment decision. Commodities are usually classified into hard and soft. Hard commodities are traditional minerals or raw materials extracted from the earth, such as petroleum (oil) and metals (gold and silver and the like); basically, products that your average trader knows well how to handle. Soft commodities refer to products that are grown, for example, coffee, sugar, wheat, grain, cocoa, and some metals, i.e., your typical agricultural products.
Traded commodities can usually be sorted into four categories:
- - metals (copper, aluminium, lead, zinc, tin, nickel);
- - soft commodities (coffee, cocoa, sugar, timber, orange juice);
- - livestock and meat;
- - agricultural (soybean, corn, rice, oat, soybean oil).
If you feel like doing something else for a change, you can also trade commodity indices, a derivative instrument traded on the market just like any other commodity for almost every category.
Commodity Trading 101
Obviously, commodity futures prices experience some seasonal fluctuations when it comes to agro commodities. Commodity markets usually follow seasonal price trends, when prices go up during certain times of the year, and go down accordingly. There are a lot of factors that can have an impact on commodity prices since a lot of commodities are supposed to be delivered to the buyer, so the price can be easily hiked up/go down depending on the volume produced/extracted and the weather. Though we wish it were that simple. Politics have their hand here, too; the political situation and conflicts in a country can affect commodity prices easily along with such obvious culprits as the delivery price and reserves. Last, but certainly not least (because it is the market we are talking about): demand at the time of purchase.
Delivery is key in agricultural commodities trading, meaning the holder of the commodity is expected to deliver on their promise and actually deliver the goods, whereas oil or gold are not delivered to the buyer—usually. But there are always exceptions to the rules. Energy futures markets are often referred to as “paper markets” because there is no actual oil, or anything delivered in the end. So, the price listed on the paper market can differ greatly from the price to be paid for the commodity. That said, agricultural commodities trading is very popular among investors, along with metals and other commodities. First, it is good for farmers selling their commodities at fixed prices as they can get their hands on money for future harvests or raw materials. Needless to say, buyers can benefit from lower prices if the market situation changes in their favour.
It is only natural to invest in commodities as a medium-term instrument.
Why Choose Commodity CFDs?
If you are a novice investor, you might want to take your time getting more experience and funds on the exchange before diving into commodity investment. It is not for everyone; commodities investing requires a lot of funds due to the size of the contract. A retail investor could hardly afford to trade in commodities. Although it does not mean you shouldn’t try and invest! That is what CFDs are for. You can buy part of the contract and only invest a fraction of the whole contract’s worth. But remember: commodities are more volatile than other assets, so even small investment can pan out and bring you a small fortune.
Commodities, as we already mentioned, are very popular. Many investors, whether retail loners or large institutions, flock to the commodity market to get themselves a piece of that profit. It is a very liquid market.
Cyclical demand means it is rather easy to anticipate price trends and movements. But make no mistake: however predictable the market might seem, there are a lot of drivers behind a price change. Anything can send the market into downward/upward spiral. Invest wisely!
Stakes are always high in commodity trading. You risk a lot if you engage in hard or agri-commodity investment as the market is easily affected by natural and human-caused uncertainties in the world. Big contract sizes can be extremely profitable or put you in the red. You might go as far as to lose your entire equity if the odds are not in your favour. That is why commodity trading is kinder to experienced traders: they tend to exercise caution when appropriate, do a lot of planning, and manage their equity to a T.