Commodities SEO 1

Transaction costs involved in commodities trading can vary among brokers and typically include the following fees:

• Spread: This is the cost of executing your trade. Spread is the difference between a security’s buy and sell price.

Margin: The margin is the money you pay to open a position. A margin account lets you make leveraged trades.

Several factors can cause the price of commodities to fluctuate significantly, such as:

• Supply and demand
• Stock and inventory levels
• Currency strength
• Inflation

When analysing commodity prices, take note of these factors that can help you determine when and at what price you should enter or exit a position.

When you have a futures contract for a physical commodity, and that contract expires, the supplier must deliver the commodities. For crude oil, you may receive a delivery notice informing you of the collection point where you will receive the physical oil barrels.

You can close or sell your futures contracts before the expiry date, especially if you think the price is acceptable for you to take a profit or roll over the contract.

Contracts for undated commodities don’t have expiry dates. These contracts don’t expire because they don’t require you to own the asset directly.

Commodity contracts have specific delivery terms you must fulfill. For example, contracts for commodity futures trading have a set delivery or expiry date. Upon reaching this date, you cannot trade the contract anymore.

The following sections discuss the differences between undated and futures contracts.

Another advantage you can gain by trading commodities is the ability to enter leveraged positions provided by a margin trading account.

With a margin account, your broker can lend cash to you using your account as collateral to purchase securities.

For example, a 5% margin can help boost your transaction size to 20 times (100% ÷ 5% = 20). 

If you have $250 in your account, you can trade up to $5,000 worth of commodities ($250 ÷ 5% = $5,000).

The leverage offered by brokers means you can take trading positions several times larger than you can afford to pay upfront. Larger transactions can also help increase your profit potential, but also increase your potential for loss, as well.

The cost of buying into a commodity position is much lower than buying the same commodity in the traditional sense. 

A broker can charge only 5% of the transaction cost, while some traditional brokers require an upfront cash payment of up to 50% of the total.

Suppose you’re a trader without the financial capacity of a prominent institutional investor. The lower price offered by a broker can allow you to enter substantial positions even with a small deposit.

Here are some ways you can invest in commodities without directly trading in the underlying asset:

• Exchange-traded products (ETFs): ETFs and ETCs (exchange-traded commodities) are cost-efficient ways to invest in commodities. You can use ETFs to analyse an index’s performance and ETCs to track commodity prices.
• Commodity-based company shares: Companies producing, mining, or processing commodities can benefit from rising commodity prices by selling these products at a higher price.
• Collective investments: Commodity funds and investment trusts can provide investment opportunities in a portfolio of companies working with commodities like agriculture, energy, and precious metals.

Taurex allows trading commodities through competitive leverage, hedging strategies, and low margin requirements. We offer trading opportunities for the following commodities:

• Metals like gold, silver, platinum, and palladium
• Crude oil (USOIL and UKOIL)
• Natural gas (XNGUSD)
• Gasoil
• Cocoa
• Coffee
• Sugar
• Cotton

Commodities are inherently linked to an organised society’s development. 

For instance, mining and agriculture are human activities deeply ingrained throughout history. People used to trade commodities for another, like a copper ingot for sugar or a bushel of grain for oil. 

As economies and societies develop, the trading and usage of commodities may also follow.

Some of the well-known commodities you can trade are energy assets that include the following:

• Brent crude oil: The oil comes from Europe’s North Sea oil fields. Brent oil acts as the world’s leading indicator of oil prices.
• WTI crude oil: West Texas Intermediary (WTI) is the second most traded crude oil. Traders exchange about 1.2 million WTI futures on the New York Mercantile Exchange (NYMEX).

Natural gas: This commodity is the third most traded commodity by volume. You can buy and sell natural gas in futures markets on exchanges like NYMEX.

The volatility of the energy market may present favourable opportunities and risks for hedgers and speculators. 

For instance, crude oil prices tend to be highly volatile due to changing demand, economic health, pipeline changes, and political events.

Examples of energy commodities include crude oil, natural gas, ethanol, heating oil, gasoline, and uranium (needed for nuclear energy).

Livestock commodity trading includes buying and selling futures based on the farm animals’ value. Trading primarily revolves around cattle and pigs on markets like the Chicago Mercantile Exchange (CME).

Futures contracts involving livestock commodities trading on the CME include:

• Live cattle options: Cattle ready for slaughter and weighing more than 1,050 pounds (lbs)
• Lean hog options: Hogs weighing around 250 lbs and ideal for slaughter
• Feeder cattle options: Weaned calves not more than 800 lbs
• Pork cutout options: Pork carcass cutouts like ham, loins, and ribs

Livestock markets are usually volatile because factors like feedstock prices, transportation costs, livestock supply seasonality, disease risk, and weather can drive price changes.

For example, rising meat prices can help increase supply, allowing farmers to bring more animals to the market and take advantage of those high prices.

Metal trading is the buying and selling of futures and options of metals and includes the following categories:

• Precious metals: This category includes gold, silver, palladium, and platinum.
• Ferrous metals: Products include iron ore and steel.

Base metals: These nonferrous (without iron) products include copper and aluminum.

The global market for agricultural commodities is among the most heavily traded markets.

Transactions involve the following:

• Futures: These are contracts to sell or buy a commodity at a fixed date and price.
• Options: These are contracts that give you the right, not the obligation, to trade a security at a fixed price and date
• Commodity indices: These are weighted averages that track the price of a basket of commodities based on spot or futures prices.

Major agricultural categories include:

• Grains and oilseeds: Products include wheat, corn, barley, oat, and soybean.
• Fertilisers: The most-traded products include urea and UAN (urea-ammonium nitrate) fertiliser derivatives.
• Dairy: These milk and dairy products include cheese, non-fat dry milk, class III milk (spreadable and hard cheeses), and class IV milk (butter, evaporated, and condensed milk).

Lumber and softs: Lumber refers to softwood harvested from coniferous trees. Softs include sugar, coffee, and cocoa.

The commodities market is not just one marketplace but a collection of regulated exchanges worldwide. Learn about the different commodity markets in the following sections.

Commodities consist of products with a standard quality and whose demand is high enough to get exchanged across different markets.

You can generally trade these assets by speculating their future value to make a profit.

However, manufacturers can also trade commodities to hedge their positions against the materials’ price fluctuations that may adversely affect the business.

Whether you trade hard or soft commodities, demand and supply usually impact their prices, and various macroeconomic events can influence the value of these assets.

Having a variety of commodities can help make your portfolio more diverse. The benefits of commodities trading include the following:

• Protection against inflation: Commodities can increase in value during periods of inflation.
• Precious metals as a hedge during adverse market conditions: Gold is usually negatively correlated to the US dollar (USD) and U.S. stocks, meaning when currencies and shares drop in value, gold is likely to move the other way.
• Potential for large profits: Commodities usually trade on margin (buying and selling assets using borrowed money), giving you a higher potential for returns and risks.

Low startup costs: Some brokers allow you to start trading with only £500. For example, Taurex’s Standard account allows trading for a £500 account minimum.

When you trade commodities, you place your stake on a particular commodity’s future value. If you believe its price will rise, you may want to buy that asset (going long). If you think the price will fall, you can sell the commodity (going short).

Like stocks, commodities can be bought and sold on exchanges. Some of the well-known ones are the London Metal Exchange (LME), Chicago Mercantile Exchange (CME), and Tokyo Commodity Exchange (TOCOM).

You can trade a wide range of commodities, including fungible ones (those of the same quality or grade) that can be priced based on a standardized quantity and quality.

Commodities consist of mined, grown, reared, or processed materials coming from natural resources or agricultural products. You can categorise these assets into hard and soft commodities.

Hard commodities are mined or extracted goods, such as precious metals, oil, and coal.

Soft commodities include wheat, coffee, meat, and cotton.

People use commodities daily. The food you eat, clothes you wear, and gadgets you use come from numerous ingredients or components using one or more of these commodities as raw materials.

Due to the necessity and daily use of commodities, supply and demand can significantly affect the price movement of these assets. Higher demand can lead to higher prices, and more supply can decrease prices.

Thus, pay close attention to supply and demand, as they can help you determine when to buy and sell commodities.

Suppose you want to buy 50 bushels of wheat. Aside from the price, you’ll have to consider transportation costs, delivery time, and warehouse storage. And when you sell the commodity, your buyer must also consider these factors.

However, with derivatives, you don’t need to own the physical commodity. Instead, you buy a contract based on the underlying asset’s value. 

Through derivatives, you have a chance to profit from commodities just by financing the transaction (paying for the contract without owning the asset). Furthermore, leverage gives you more freedom and a chance to profit significantly from small price changes but can also carry the risk of equally significant losses.

To start trading commodities online, sign up with a licensed and reliable online broker that offers commodities trading.

After opening an account, choose a commodity by taking a position and buying or selling that asset. Afterwards, monitor your trades to determine when you should exit your position and take profits.

Disclaimer: The products or services discussed in this article may not be offered by Taurex and may only be listed here for educational purposes.

Commodities are raw materials like agricultural products, fossil fuels, and mineral ores. You can trade these physical goods in a financial market distinct from other securities like stocks and bonds.

The end of March 2023 saw global commodity prices fall roughly 30% below their historic June 2022 peak. According to the April 2023 World Bank Report, the price slump was mainly caused by slowing economic activity and a worldwide reallocation of commodity trade flows. 

Another reason was the favourable winter weather that helped bring natural gas prices down by about 80% from their August 2022 maximum.

Policies hastening the energy transition help increase demand for metals like copper, lithium, and nickel and discourage fossil fuel production.

Such developments can help traders identify new trends in commodity trading. Trends help traders determine how to manage their portfolios to account for economic downturns.

But how do you trade commodities online, and what types of commodities can you trade? How can you improve your commodity trading if your profits aren’t doing well?

This article discusses the different commodities you can trade and provides tips to help you improve your trading skills and manage risks.