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What are Commodities and How to Trade Them

Commodities (raw material) : Metals, Food, Energy

Commodities, they are a physical good, often used precisely as raw materials in the production of goods and services.

In order to be marketable, commodities must be interchangeable with other raw materials of the same type and grade.

They fall into two categories:

  • Hard commodities, i.e. metals ( silver, gold, platinum ...) or natural energy resources (natural gas, oil ..).
  • Soft commodities, i.e. agricultural products.

Buying and selling of commodities is called "commodities trading". The investment in raw materials worldwide takes place mainly through futures. In particular, futures listed on the CME - Chicago Mercantile Exchange. There are two types of "commodities trading" the spot market and the future market.
The spot market is used for commodities that are delivered immediately, while the futures market refers to goods that expect a delivered on a future date.

The commodity markets like futures and futures options, are  leveraged instruments means  only a small amount of capital is necessary to control a much larger amount of the commodity creating a higher of risk. Greater potential for reward means also higher risk! commodity investment are not right for all.

Some of the most traded commodities are:

  • Gold
  • Silver
  • Petroleum
  • Wheat
  • Natural gas
  • Copper

Commodities exchanges, Commodity market

   New-York-Mercentile-Exchange

Investors access about 50 major commodity exchanges worldwide, Africa (Ghana Commodity Exchange, Egyptian Commodities Exchange,  South African Futures Exchange, ..) Americas (Brazilian Mercantile and Futures Exchange,  Chicago Board of Trade  (CME Group),  Chicago Mercantile Exchange, ...) Asia (Hong Kong Mercantile Exchange,  Manila Commodity Exchange, ...) Europe (Deutsche Börse/Eurex,  NYSE Liffe, ...) Oceania (Australian Securities Exchange, ...). 

The commodity market is a market that trades in cocoa, coffee, fruit and sugar, gold and oil, gas and more...

Important to remember the trading volume, the top commodities such as Gold, US Crude Oil, Brent Crude, ,Natural GasCopper are considered liquid markets means easy to trade(buy or sell), also products such as coffee, wheat and sugar are featured on the list of most traded commodities, but for example, markets like oats or orange juice are less liquid and it may be more difficult to find a buyer or seller. Before investing in a market, check its liquidity.

How to Trade Commodity

Investors buy and sell commodities through forward contracts on a stock exchange. You can trade commodities through a commodity broker by creating an online account. Most commodity negotiators do not take physical ownership of the assets (I remember this is expected at the end of the contract future). Commodity speculators / traders take a financial position (long or short) on a commodity, such as gold. 

Futures

Futures contracts provide the most direct way of investing, as they establish an obligation to buy or sell a commodity at a predetermined price and date. Futures (leverage instruments - high risk). Trading in futures it is expensive, requires a margin of garantee (balance that must be maintained) and an additional capital or an adjustment of margin value in the event that the value of your investments drops too much.

CFDs

Commodities can also be negotiated with CFDs (contracts for difference). A CFD is a contract to exchange the difference in value of an asset from the moment the contract is opened to the one in which it is closed. CFDs are simpler and less expensive than futeres. 

ETF Exchange-traded fund

ETFs (Exchange Traded Funds) are passively managed investment funds. When you buy an ETF it is as if you were buying a basket of securities. Investing in a fund is equivalent to putting your savings together with that of other investors, the fund manager will then purchase the instruments on which you will invest with this money. The investment performance will be given by the result of all the individual instruments on which the fund invests.

ETFs aim to replicate the performance of a specific index or the price of a specific asset class. The performance will therefore not depend on the skill of the manager but on the performance of the chosen index.

There are several indices available to invest with ETFs of commodities, for example: Lyxor Commodities Thomson Reuters/CoreCommodity CRB TR UCITS ETF AccISIN LU1829218749, UBS ETF (IE) CMCI Composite SF UCITS ETF (USD) A-accISIN IE00B53H0131, iShares Diversified Commodity Swap UCITS ETFISIN IE00BDFL4P12


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