Every day, traders around the world search for opportunities that can generate returns. A lot of attention is given to the foreign exchange markets and stock markets, where deals worth trillions of dollars are made. However, the commodities market is sometimes overlooked. If you’re an online trader, or are interested in starting, this article explains a few details about trading commodities and why you should consider them.
What are commodities?Commodities are simply the raw materials that are used in the manufacturing industry, or as food or energy. There are four main types of commodities that you can trade today. Metals There are two main types of metals. Precious metals are rare, high-value metals that include gold and silver. There are also metals like copper and tin, which are called industrial metals. Energy Energy commodities, as the name suggests, are used to produce energy. They include crude oil, heating oil, and natural gas. These are found in a few countries around the world. Agricultural Agricultural commodities are mostly used for food and other functions. They include corn, soybeans, cotton, and sugar among others. Animal Finally, animal commodities like cattle and lean hogs are used mostly for food and industrial purposes.
The main reason why you should consider trading commodities is that they are the backbone of the global economy. In other words, without them, other sectors of the economy would not function. For example, without crude oil, it would be impossible to manufacture and transport products. Without cotton, the fashion industry would not be the same. And much of world’s population depends on wheat for food. As a trader, you need to understand a few things when trading commodities. First, you need to have a good understanding about the demand and supply of the commodities. This is the most important factor that determines the price of the commodity. Therefore, it is important to learn where the commodities come from. For example, when trading in copper, you need to understand the importance of Peru, which is the biggest supplier, and China, which is the biggest consumer. The data on supply and demand is available online. You also need to understand how the market interprets the data. For example, if the US Energy Information Administration releases oil inventory data that is higher than the market expectations, this could move the oil price. Finally, you must also consider the overall market conditions in the commodities market. For example, if the economic forecast is for a sustained period of global growth, the price of crude oil could go up because it means that demand will rise. There are two methods you can use when trading commodities. First, you can buy the physical commodities at the local exchanges or markets. For example, you can buy a few ounces of gold, barrels of crude oil, or a few kilograms of soybeans. Obviously, this is inefficient and not practical for most traders. However, the most common and user-friendly method to is trade commodities with CFDs (contracts for difference) via an online broker. For example, a range of commodities are available from easyMarkets, as well as other assets, which can be traded via its website or its mobile app. The advantage of using a CFD is that you can trade when the market is going up or down. Therefore you can potentially profit whatever direction the market moves. You don’t need to own the physical commodity. It also allows you to use leverage, which means that you can use borrowed money to trade bigger amounts. Plus, you can trade with amounts that cost less than one unit of the commodity. This is a benefit when you’re trading expensive commodities, such as gold.
Veselina Dzhingarova, co-founder ESBO, currently works as a branding and marketing consultant, bringing together the knowledge and intuition that she has developed over many years spent working in relevant fields. You can get in touch with her on LinkedIn, Instagram, or at v.dzhingarova@gmail.com |
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