Commodities Trading- The Basics
Commodities trading refers to the trading in commodities such as metals, energy products or agricultural products. These commodities are typically those that are used as raw material in the production of other products or services. The prices of these commodities are generally determined by global demand and supply conditions. Furthermore, the supply and demand are influenced by weather conditions, excessive supply scenarios like wars or calamities and in some cases geopolitical events.
Some examples of commodities products are oil, gas, petroleum, gold, copper, coffee, sugar and so on. The commodities market offers a very effective way to diversify a portfolio and does give better returns on investment through http://www.xglobalmarkets.com/learn_center/lots-sizes-pips-calculation/. Interestingly, since they are based on prices of these commodities, they offer better return even in inflationary conditions as compared to stocks and bonds which tend to perform badly.
Out of the commodities that are traded, energy commodities such as crude are followed quite closely as their supply and demand do play a huge role. A fall in the crude prices affects the oil producing Middle-east countries quite badly as they depend quite heavily on it for their income. Alternatively, the West is significantly impacted by rising crude prices. The four types of commodities that are generally traded are as follows:
Basic characteristics of Commodities trading:
Typically, global developments affect trading in commodities. Their overall demand and supply and conditions affect the prices. For instance, developing economies such as China and India with its increasing investments in the infrastructural projects have had an adverse effect on the supply of steel to the western countries.
Generally, metals are the more popular commodities that get traded. Historically as well gold and metals have been steady and used commonly as a hedge in inflationary and bearish markets.
Energy also plays a huge role in the commodities market and is keenly followed by several investors who have their money banked in this market. It is necessary to follow the Middle Eastern Countries and small developments will also cause changes in the prices. In addition, several decisions made by OPEC( Organization of the petrol exporting countries), developments in emerging technologies such as Biofuel, Solar, Wind etc. should be followed to understand the impact on the energy prices and hence the commodities.
Risk: Just as any other stocks or bonds in the stock market, these commodities are also not averse to risk. In fact, they can be quite the risky proposition. The chief reason here would be that huge changes in their prices and movement can be caused by natural disasters or weather movements which cannot be predicted. For instance, investment in food related commodities can be seriously impacted by sudden weather changes of an extended period of summer and dry conditions. Grains are generally very actively traded and hence it is better to tread cautiously. It is generally advised that you do not dedicate more than 10% of your portfolio to commodities.
With more and more people wanting to be part of the commodities market, there are several markets around the world that trade in commodities. While some of them are known to trade in a sector, there are others that deal in all commodities as well. For instance, the London Metal Exchange which is famous for metals, the US Futures Exchange popular for the Energy commodities alone.
Investing in commodities can be worthwhile only if you make informed and well-researched investments. Unfortunately, most people find themselves arriving at the party a tad bit late and by then the opportune moment has passed. So how does one stay ahead?
Always make sure you read and keep yourself abreast of happenings around the world.
Make sure you read and understand the developments after the close of markets as well. This will give you time to take advantage of any developments that may occur before the market opens the following day
If you are stuck in a bearish market, you can hold money in the commodities market and still not lose money. This could be a temporary thing until things look up in the stock markets. Sign up on a reliable website that offers great insights and good analysis of various stocks. You can customize it in a manner that you get insights about products, commodities and markets you have an interest in. That way you are always ahead of the pack.