Commodity trading

About the market

Many traders are attracted to the commodity market because there is an opportunity to speculate on the price of oil and gas on favorable trading terms. The brokerage company provides all the possibilities for this, from reduced spreads to access to various tools for analyzing raw material charts.

What Are the Types of Commodities?

Commodities are characterised across two main axes: hard/soft and categories. Hard commodities are those that are extracted from the earth, such as mining products metals and oil products, for example. Soft commodities are those that are grown primarily agricultural, including livestock. Separated into categories, commodities can be metals, energy, livestock & meat, and agricultural (cultivated products). To be interchangeable, these products must conform to a set of characteristics as determined (usually) by a commodities exchange where the specific commodity is traded. The characteristics are set in order to enable large-scale production and distribution based on a single quoted price. Thus, for example, Gold that is traded on the Shanghai Gold Exchange, the London Metal Exchange and COMEX (the US Commodities Exchange in New York), must be of 95% purity minimum, and 99.9 and 99.99% purity are common. Its price is quoted in dollars per 1 troy ounce. Thus, each bar of tradeable Gold will be the same no matter where it was created and/or traded or at least priced with reference to it. Oil is traded under (mainly) 2 benchmarks West Texas Intermediate for most US products and Brent from the North Sea oil fields. WTI, as traded by NYMEX (the New York Mercantile Exchange) for example, is light (between 37 and 42 degrees API gravity) and sweet (less than 0.42% Sulphur content).

How to Invest in Commodities

Very few people actually invest in physical commodities. Unless they are directly related to the supply chain in one way or another, the outlay for storage and transport can be quite inhibiting. However, ever since commodities have existed (since prehistoric times, in fact), contracts have been created for their exchange, as well. The first options contract is believed to have been created by Thales, an ancient Greek who took an option on the country's olive presses. Tulip futures were the first case of a market bubble bursting. And what these usually had in common was the desire to protect the interests of producers and marketers against natural disasters, gluts and so forth by locking in prices ahead of time. In fact, the situation today is such that Gold, for example, is leveraged to the extent of $200-300 worth of contract derivatives for every $1 of physical gold in existence. Contracts-for-Difference (CFDs) are the latest innovation in this respect a sort of swap contract created, actually, for the real estate market towards the end of the 20th Century. Since then, they have become one of the most popular types of derivative traded, primarily by retail traders trading over-the-counter with online brokers around the world. They are simple to understand (the profit/loss being the difference between the opening and closing prices of the contracted asset) relatively cheap (the transaction cost usually covered by the open/close spread) and traded on margin, which opens the gates to people of more limited resources, on the one hand, but also increases the potential profit/loss in accordance with the leverage offered. All commodity instruments available on Trade 360 platforms are CFDs.