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,c
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 pries 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!
Risks
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.
