Commodities Trading – An Overview


What is trading?
Trading in simple terms refers to the action of buying and selling goods, primarily aimed at gaining profit. Though historically trading began with the exchange of goods or services among the interested parties, the invention of currency initiated a new parameter of trading in where the products and services were exchanged for the money bargained.
In Financial terms, trading is defined as the exchange of securities such as stocks, bonds, commodities, and derivatives etc. among the buyer and the seller, where a broker, either the real or virtual, is involved in facilitating the exchange by following certain trading standards and regulations enacted by the governing bodies.

Types of trading markets
Trading is a versatile sector, in which you are allowed to choose your market of interest among different available market varieties. Although the basic aim of anybody who involves themselves in trading is earning a profit, it is not only with this typical motto you can choose your trading market on
Choosing a particular trading market depends upon your time of trading, financial strength, geography, trading strategy and much more and one has to carefully scrutinize these parameters before taking the plunge.
Following are the popularly known trading markets booming with active pursuers of trading.

  • Stock market
  • Forex market
  • Commodities market
  • Options market
  • ETF market

Each market prescribed here involves in trading specific entities and has their own world of rules and regulations.

Commodities Trading – An introduction
Commodities trading are the oldest form of trading, where the trading or speculation is carried out for the primary goods rather than the manufactured ones. Raw materials like wheat, corn, sugar are called soft commodities and others such as gold, oil etc., which are mined, are called hard commodities.
Commodities trading need not be practiced with the actual delivery of the commodity; that is, one need not really buy the commodity to involve in this trading, as in equity trading, he/she can also be a speculator.

Commodities trading – Types
The commodities trading can be either of the following two types,

  • Spot commodity trading– This is a physical trading involving the exchange of commodities in real-time. The goods are sold for the current market value to the buyer on the spot. In other words, the buyer gains the ownership of the commodities immediately.
  • Futures commodity trading – This is a derivative trading in where instead of the actual goods, the contracts or the futures regarding the goods are sold. That is, a contract for the future delivery of the commodity for the quantity and price agreed upon during the commitment is enacted.

 This is the most commonly practiced form of commodity trading, in where the trading happens in the commodities exchanges and is delivered for the committed price mentioned in the futures, instead of the current market value. That is, the buyer gains the actual ownership of the commodities at a future committed date or before the mentioned expiry date of the contract.

Commodities Trading – Categories based on commodity types
The four important categories of commodity trading depending upon the commodities actually traded are,

  • Energy – Includes commodities like natural gas and oil such as petroleum, crude oil etc.
  • Metals – Includes precious metals like Gold, platinum, silver and non-precious raw materials like iron, copper etc.
  • Livestock and Meat –Such as pork bellies and other raw meats, live cattle etc.
  • Agricultural – Such as wheat, corn, sugar, coffee, soybean etc.

Commodities Trading – Participants
Following are the important participants of commodities trading who actively run the commodities trading business in different forms.

  • Hedgers

These are the people who hedge themselves from future market fluctuations in commodities trading. Hedgers are basically the consumers who hedge themselves against future price hikes and producers who hedge themselves against future price falls. Nevertheless, hedgers are the people involved in this commodity trading with the actual intention of buying/delivering the goods.

  • Speculators

With no intention of actually dealing with the physical trading, speculators are the people who want to ‘make hay while the sun shines’. Or in simple terms, they wanted to trade or speculate along with the flow of the market and make some profit.

  • Arbitrageurs

These are the people involved in the apparently risk-free form of commodities trading, in where the arbitrageurs buy and sell the commodities in different markets for price differentials. That is, they buy and sell commodities at different markets, simultaneously by maintaining the price range in par with each other.

Characteristics of Commodities Trading

  • Leverage

An important aspect of futures commodity trading, in where you can make the minimal margin investment and leverage or borrow the remaining money required for the trading. That is, even if you don’t have the entire money required to buy the commodity, you can invest with the margin amount and choose to leverage the remaining amount. Your broker or the online leveraging tool can guide you in deciding the amount to leverage.

  • Hedge from inflation

By involving in futures commodity trading, you are actually protecting or hedging you from inflation as the commodities are one of the primary deciders of the inflation rate.

  • Volatile

The commodities trading is risky due to its volatility, in where the devastations caused by natural calamities like cyclone, earthquake etc. can drastically bring price changes and you might end up losing your entire capital amount.

  • Varieties

You have the benefit of choosing your interested commodity type, as commodity exchanges worldwide carry out trading of wide varieties of commodities as discussed above.         

In conclusion, don’t gamble your money by speculating wild, understand how the commodities market function and engage in judicious trading practices.