Commodity Trading: What It Is & How To Get Started
While we’ve all been told that money can’t buy happiness, it is an integral part of our life. Suppose you’ve ever looked into how to start commodity trading as an opportunity to diversify your financial portfolio. In that case, you’re likely familiar with topics such as real estate investing, stocks, forex trading, or cryptocurrency. One of the world’s oldest trading markets is commodity trading, which started thousands of years ago using clay tokens to exchange for goats.
What is commodity trading? How do you start commodity trading? How can you find and use reliable data analytics to help you make the best of your trading? This article will explore all of these topics. To start with, though, let’s look at what exactly we mean by “commodities.”
What Are Agricultural Commodities And How Are They Traded?
When talking about commodities, we’re talking about a standard type of essential good or raw material. In general, you can separate them into four categories:
- Agricultural commodities (like corn and soybeans)
- Precious metal commodities (like silver and gold)
- Energy commodities (like oil and gas)
- Livestock commodities (like cattle and meat)
Of course, when talking about trading commodities, we aren’t talking about these items’ physical exchange. You don’t need to purchase a large warehouse full of rice or a truckload of hogs or cattle to start with commodity trading!
The modern market has evolved to use many different online methods, including:
- futures contracts (a contract that is set for a future date and a fixed price),
- exchange-traded funds (a fund used for a bundle of financial assets), and
- contracts for difference (a deal where you lose or gain the difference in trade value at the end of the contract).
Many people look to commodity trading as a way to diversify their portfolios for increased financial security. Instead of their investments being tied up in only one place, like real estate or stocks, they can have various income streams to fall back on in case of an economic downturn. Another advantage of commodity trading is that, unlike the stock market, the commodity markets are available 24 hours a day.
If you think that the price for a specific commodity will increase, you will buy futures contracts to sell later at a profit. If you believe that a particular commodity price will decrease, you will sell off futures contracts to gain the difference in value. How, though, do you know how the costs are going to change?
Factors That Influence The Prices Of Commodities
Many factors can influence the prices of commodities, and it’s good to know what they are so you can better predict market changes.
Supply And Demand
Two of those critical things are the positions in the markets, the amount of futures contracts bought or sold by either:
- “commercials” (the folks who need raw commodities, such as soybean processors, bread makers, meatpacking plants), OR
- non-commercials or speculators (folks like we’re trying to talk to here, who are only speculating on the markets and never plan to take physical delivery).
Strength of the USD
Within the international markets, commodities are priced in U.S. dollars. As a result, the USD’s strength in comparison with foreign currencies has an impact on the buying power and the cost of commodities. Depending on the commodity, higher or lower USD values can either increase or decrease the commodity’s value in the market.
Politics and World Events
In our daily life, we can see how much the economy is dependent on political factors. For example, with tensions and uncertainty in the Middle East, oil price tends to be very volatile and can change quickly. During the COVID-19 pandemic, the cost of oil plummeted due to decreased global demand.
Even though the weather might not be the first thing you think of, it plays a large part in the value of commodities, especially in agricultural commodities. Let’s take corn, for example. Imagine that drought and a bad harvest have limited the amount of corn available in the market. Because of this decrease in supply, prices would increase accordingly, making for a potential profit if you were to sell your futures contracts.
How To Start Commodity Trading
If you feel ready to get involved with commodity trading, where should you start? With the prevalence and growing popularity of online trading, it’s becoming easier to step into the world of investments – but it also means the increase of uninformed traders that risk significant losses. Make sure you come prepared and do your homework!
First off, you should do a lot of market research to look at the prices, history, and risks of various commodities so you can decide which commodity to get started with. It’s also important to know that leveraging is very common with commodity trading.
Leveraging is when you buy more of a commodity than you invest, so for example, you can invest $100 and buy $1000 of a commodity. That means you can gain – and lose – way more than your initial investment. Because of this, you need to understand the risks involved before you start. Many brokers offer simulated markets to help first-time or new investors practice and gain experience with trading. It’s essential to start with smaller trades and work your way up to more significant investments.
Of course, understanding the market will be invaluable if you want to succeed with your investments. The underlying supply and demand are constantly changing, and they rely on many external factors and data points.
What You Need To Succeed With Commodity Trading
Because there is so much data to consider and analyze to understand and predict market changes correctly, most investors rely on data analytics services to provide detailed insights to make informed trades.
Thousands of customers benefit from the real-time data and high-level analysis of U.S. and global trade, production, consumption, and stocks that the DTN ProphetX suite of products provides. The exceptional tools and information available to investors, including high-performance weather information and commodity-specific news and analysis by full-time DTN commodity experts, will help expand your knowledge and support more profitable trades in over 50 commodities.
Contact DTN today to begin your free demo and see how you can benefit from the DTN ProphetX service. With the right tools, you can make your commodity trading a success!