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A Brit’s Guide to Understanding Commodity Trading

A Brit’s Guide to Understanding Commodity Trading

Nikolas Xenofontos, head of risk management at easyMarkets

Whether you realise it or not, commodities are an important linchpin of human civilisation. From the food we eat to the fuel that powers our modern modes of transportation, commodities are what make the world go round. Commodities are not only consumed but may also be invested in as well. That’s why banks, hedge funds, institutional investors, businesses and even nation-states trade in commodities each and every day.

The power of the internet has brought commodities investing to Brits on a silver platter, enabling people from all walks of life to possibly increase their personal wealth through metals, energy, livestock and agricultural products. These are the four main categories of commodities that are bought and sold on the market each day. Below we cover them in a little more detail before showing you how you can access them on the open market.

Metals

In commodities trading, metals are of two types: precious and base. Precious metals are the really shiny metals that are valued for their rarity and high economic value.[1] The most common examples of precious metals are gold, silver and platinum. Precious metals are considered “safe haven” assets for their ability to retain value during times of market turbulence and uncertainty. When there’s fear, investors park their money into gold and silver.

A base metal, on the other hand, tends to corrode relatively easily, which makes it more useful in commercial and industrial applications. Base metals are more abundant than precious metals and are therefore cheaper. The most common base metals include aluminum, copper, lead and nickel.[2]

Energy

Energy commodities include products like crude oil, natural gas and gasoline. As you can imagine, energy commodities play a huge role in the global economy because nations rely heavily on these and other fossil fuels to keep their economies running. Oil prices are influenced by such things as production, the supply-demand balance and even politics. The price of oil also influences other financial markets ranging from stocks to currencies, which are a conversation for a later time.

Livestock

Believe it or not, livestock and meat are bought and sold on the financial markets. Livestock – domesticated animals raised in an agricultural environment for commercial use – are popular investments due to their growing demand and role in many commercial processes from food to clothing. Take cattle, for example. Cattle are valued for providing milk, leather, meat and even labour making them a valued investment.

Agriculture

Agriculture is a massive global industry that feeds billions of people. Soybeans, corn, wheat, coffee, cocoa, cotton and sugar are all available on the futures market, giving investors exposure to diverse economies. Factors that affect agricultural supply – overconsumption, population growth, extreme weather, droughts and other forces – have a major impact on prices.

Trading Commodities

If you’re new to commodities trading, you’ll be relieved to learn that metals, energy, livestock and agricultural may be bought and sold through the futures markets and via contracts for difference (CFDs). This essentially means you never have to deal with the physical commodity itself. If that’s not convenient enough for you, try getting 40,000 tonnes of cattle meat delivered to your front door – not a pretty sight in downtown London!

Futures: A futures contract was originally designed to protect producers from sudden swings in prices. Over the generations, futures have evolved into a profitable way to trade the commodities market. A futures contract is essentially an agreement to buy or sell a commodity at a predetermined priced and date. The payment and/or delivery of the commodity is made on the future date specified in the contract.

Contract for Difference (CFD): A contract for difference is an agreement to close out a contract for the profit or loss, which is determined by the difference between the opening price and closing price of the asset. In the case of a CFDs, the profit or loss settlement is made through cash rather than physical delivery of the asset. CFDs provide an excellent way for traders to access commodities without actually owning the underlying asset. CFDs are popular because they may allow traders to make money from rising and falling prices using leverage, an extremely powerful tool in the highly liquid commodities market.

Indirect Investment: Another possible way investors may gain exposure to commodities is by purchasing stocks and mutual funds, which are considered indirect investments. However, it’s important to remember that stocks and mutual funds are completely different asset classes that aren’t always influenced by the same factors that dictate the commodity markets.

Invest in Commodities from Home

The growth of online trading platforms has made commodities investing easier and more accessible than ever before. Accessing the market is as easy as registering for a trading account with a leading financial institution. While there are many financial brokers to choose from, only a small handful have withstood the test of time.

easyMarkets is a fully regulated Cyprus-based brokerage that has been in operation since 2003. Its platform is ideally suited for new investors just learning about commodities to experienced traders looking to access the market on a full-time basis. The easyMarkets Learn Centre is a good place to get up to speed on commodities investing, including tutorials on CFDs and vanilla options.

easyMarkets offers investors direct access to precious and base metals, energy products and agricultural goods. More than 300 markets are available on their state of the art trading platform, ensuring a seamless investment experience across all markets.

Commodities investing doesn’t have to be intimidating. By arming yourself with knowledge and a powerful investing platform, you are well on your way to developing a successful investing programme.

Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).

[1] Investopedia. Precious Metals.

[2] Investopedia. Base Metals.

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