Commodities, whether they relate to metals, energy or food, play an important role in everyday life. Anyone who is a car owner can see a major difference in the amount they pay for petrol by rising crude oil prices. Plus, the impact of a drought on certain food items may influence what you can eat for your next meal. Similarly, commodities trading can be a great way to diversify your investment portfolio beyond traditional securities. You could opt to use commodities trading to park some cash in highly volatile stock markets, as commodities will typically move in opposition to stocks.
In the past, the average investor did not even consider looking into commodities trading because of the significant amount of time, expertise and money it required. That is no longer the case today. There are now several routes when it comes to trading in commodities.
What is Commodities Trading?
If you choose to trade on commodities, this is a way to speculate on the future price of a particular good like oil, gold or even cotton. Unlike Forex trading, commodity trading takes place on structured exchanges. Regardless of whether you opt to trade on commodity CFD’s or spread betting, you will be trading on the underlying cost of that good.
Typical Investment Characteristics of Commodities
With the commodities markets, basic economic principles will drive these markets. Generally, this means that a lower supply will more than likely drive up demand, which equals higher prices. Also, major disruptions to a supply chain, such as a widespread health scare amongst livestock could lead to a spike in the overall stability of that market.
Types of Commodities
Nowadays, tradable commodities fall into four main categories. These include:
- Energy: gasoline, heating oil, crude oil and natural gas
- Metals: copper, gold, platinum and silver
- Agricultural: coffee, soybeans, wheat, corn, rice, cotton, cocoa and sugar
When we witness particularly bearish or volatile stock markets, you will likely see worried investors transferring funds to precious metals, which usually offers a safe and dependable value.
Investing in Commodities
One of the most popular ways to invest in commodities is through a futures contract. This is an agreement between two parties to purchase or sell a certain amount of a select commodity at a set price in the future. You can trade in commodities through futures in every category of commodity.
Advantages of Futures
- You can go long or go short easily
- This is a pure play on the underlying commodity
- If you’re on the right side if the trade, leverage can mean big profits
Disadvantages of Futures
- Future markets can be incredibly volatile, which means direct investment can be risky
- Leverage magnifies both losses and gains
With commodities trading, future contracts will expire, so you will need to be aware of being closed out of a particular contract before you intended.
Online trading platforms like ETX Capital make it easy for you to begin trading in commodities, as they have an innovative platform with a support team on hand to help you out. Choose a trading platform that is regulated by the FCA is a must, so look out for this on the providers website.
Just remember, there are some key differences to this approach, so you will need to be aware of concepts like future contracts before starting.