I'm just a commoodity

All You Need To Know About Commodities Trading

June 7 by Cristóbal Crespo

It’s eight in the morning, you’re having a coffee with your semi-burnt toast while reading the news. You find out that the global invasion of wheat-devouring pests have reached epidemic levels. So the bread you’re eating could very well be in dire shortage not long from now…

You could take advantage of the news and start trading wheat commodities because you know the scarcer a commodity becomes – the higher the price goes.

But before we tell you more about commodities trading, let’s start with the basics.

What are commodities?

The cynics will say everything has been commoditised these days, even love…

But a true commodity is any product that can be bought and sold, and is uniform across producers. There’s very little distinction between commodities of the same type so no matter who produces it, they will be regarded the same. Copper is copper, regardless of which company’s mine it came out of.

Just like rock music, commodities can be categorised as hard or soft. Hard commodities have to be mined or extracted, for example, metals like gold, silver, platinum and copper. Commodities like wheat, cocoa and soybeans are called soft because they have to be grown, rather than mined or extracted.

How did commodities trading originate?

The practice started long before people even started dealing in stocks and bonds. Ancient civilisations were trading commodities like agricultural crops, livestock and rare seashells. It was pretty straightforward: “I’ll trade you silver for a herd of goats.” (If you’ve ever played Settlers of Catan, you would be familiar with this concept.)

Then it got a little more sophisticated. As commodities take time to extract/produce and process, this eventually gave rise to futures contracts between merchants and buyers. This is an agreement to buy or sell a commodity that will be delivered in the future for a price agreed now. For example, if a farmer plans to harvest 500 bushels of corn next year, he could lock in the price with his buyers now. By doing so, he’s hedging against the risk of falling corn prices.

Dang these corn-eating pests

Commodities trading helped to oil the wheels of commerce. In fact, the Amsterdam Stock Exchange, which is often said to be the first stock market in the world, initially existed for the exchange of commodities.

Soon, futures became a “commodity” as well – people could now trade prices instead of physical goods. This allowed many more people to participate in the commodities market.

How do you get involved in commodities trading?

Well, there are 3 ways. Firstly, you can buy the physical commodities. But just because you’re interested in investing in silver, it may not mean you want to buy actual bars of silver, not to mention a warehouse you’d need to store all that in…

Then there are futures contracts, which we’ve already talked about above.

Finally, there’s the spot market which allows people to trade commodities instantly, based on real-time prices in the marketplace. This is also known as the spot price. With BUX, you can open spot positions in commodities. These have no expiry dates, meaning you can keep your position open for as long as you want to and profit from fluctuations in prices.

What influences the price of commodities?

As most commodities can’t be simply produced in a factory, their output and prices can be impacted by many external factors, from the weather to political conflicts. Plus, of course, the laws of supply and demand.

For instance, if the World Bacon Organisation (fun to imagine for a second that such a group does exist) decides to cut production, that’s going to affect the price of bacon for sure.

In the simplest of terms:
If Supply > Demand = Price falls
If Demand > Supply = Price rises

However, if supply outstrips demand and causes the price to fall, the new rock-bottom price could actually help to stimulate demand. (Wouldn’t you eat more bacon if it was cheap?! I know I would.) Rationally speaking, this could help to boost prices again.

 Is commodities trading just like stock trading?

Like how you’d perform a fundamental analysis on a company before investing, it’s just as important for you to know the fundamentals of the commodity you are looking to trade.

Say you are investing in platinum. It would be useful for you to do some homework on mine output, demand cycles and which industries rely on this metal. Platinum is used a lot in the auto industry so if there was suddenly significantly less demand for cars, then that would hit platinum prices too.

Commodities can react more strongly to economic and political news. For example, when there is a political sh*tstorm, the price of gold goes up. This is because gold is considered a “safe haven” that investors flee to in times of uncertainty as they dump riskier assets like stocks.

With stocks, you can sort of forecast how companies will do based on their projected earnings, etc. But commodities are often affected by external factors that are a lot harder to predict. Think a freak weather event or a sudden epidemic that kills off crops.

Because of all this, the prices of commodities can often fluctuate so there is a degree of volatility. While some equate volatility with risk, others see it as an opportunity for profits.

The use of leverage, which magnifies both profits and losses, is also fairly common in this market and is a major reason why it appeals to many traders.

Commodities trading with BUX

While there are options to trade with most of the things you consume daily like coffee, wheat or marijuana…on BUX, we only bring you the most important ones: gold, silver and platinum.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77.7% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.