Comprehensive Guide: Commodity Trading For Beginners

The global economy is driven by commodities, from the oil powering our vehicles to the precious metals embedded in our electronics. These raw materials are consistently sought after. Yet, for prospective investors, the realm of commodities can appear intricate and daunting.

Fortunately, diving into commodity trading and investment has never been more accessible. However, before you begin, it's crucial to establish a firm grasp of the basics.

What Is a Commodity?

A commodity refers to a basic raw material that can be cultivated, extracted, or mined for use in producing finished goods. Our daily activities influence the commodities market, from enjoying a morning cup of coffee to selecting our clothing, driving our cars, and shopping for groceries.

Commodities serve as the essential components of nearly everything we use in life, whether sourced from deep within the earth or grown in the soil. Over time, commodity trading has developed to alleviate financial fluctuations encountered by producers and users. Both parties typically make significant capital investments before establishing market prices.

Types of Commodities

Commodities can be categorized in various ways, with no strict rules governing these classifications. Each category encompasses a wide range of items. For instance, an ETF might represent a broader classification, while futures trading can focus on specific commodities or indices.

Tradable commodities typically fall into several categories, including:
1. Grains
2. Softs: cocoa, coffee, cotton, orange juice, sugar
3. Livestock: feeder cattle, live cattle, lean hogs, pork bellies
4. Energy: Brent crude oil, WTI crude oil, gasoline, heating oil, natural gas
5. Metals: steel, copper, iron, gold, nickel, palladium, platinum, silver, aluminum
6. Other: lumber, rubber, wool

When discussing commodities, the terms "hard" and "soft" are commonly used:
1. Hard commodities are those that must be mined (e.g., gold, silver) or extracted (e.g., rubber, oil).
2. Soft commodities refer to agricultural products (e.g., corn, soybeans, wheat, rice).

The term "raw" is also frequently used to describe any unprocessed material used in production.

Among commodities, oil is the most valuable traded product. The energy sector, often referred to as the "Mother of All Markets," accounts for over $1.3 trillion, which is approximately 3.6% of global GDP. Oil leads this category, which can be further divided into different crude oil types, heating oil, and natural gas.

Commodity Risks

Various factors, including weather, competition, and inventory levels, can lead to significant price fluctuations in the commodities market. Here are some key macro risks to consider:

1. Volatility: Commodity trading carries a high-risk profile, which means that while the potential for profit is substantial, so is the risk of loss.

2. Geopolitical Events: Geopolitical tensions can greatly influence commodity prices. For instance, recent conflicts in the Middle East have triggered a surge in gold prices.

3. Macroeconomic Conditions: The state of the global economy plays a crucial role in commodity pricing. A downturn can lead to decreased demand for certain products, putting downward pressure on the commodities associated with them.

4. Weather: Weather-related events can significantly affect commodity prices. Extreme conditions, such as heat waves or droughts, can disrupt food supply chains and drive up prices for staples like wheat.

5. Inventories: Inventory levels are critical indicators of supply and demand. High inventory levels suggest an oversupply, which can depress prices, while low inventory levels indicate potential scarcity, often resulting in price increases.

Commodity CFDs

Like options and futures, CFDs (Contracts for Difference) are another derivative that can be used to speculate on commodities.

A CFD is a contract between a trader and a broker. CFD traders may bet on the price moving up or downward. Traders who expect an upward movement in price will buy the CFD, while those who see the opposite downward movement will sell an opening position.

CFDs allow you to trade on margin, meaning you only need to deposit a percentage of the total trade value. This enables you to invest significantly less capital when trading commodity CFDs compared to futures contracts. CFDs provide a straightforward way to potentially profit in both rising and falling markets. For instance, a trader can profit from a declining market by opening a "Sell" (or short) position, aiming to sell high and buy back at a lower price. The profit is the difference between the selling price and the purchase price.

Today, average retail traders have access to a wide array of assets through CFDs. Platforms like Plus500 offer a user-friendly interface where clients can trade CFDs on commodities such as gasoline, gold, heating oil, natural gas, oil, Brent oil, palladium, wheat, soybeans, and more.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.