Commodities and Currencies

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Two often-overlooked (by individual investors) forms of investing are commodities and currencies. They tend to be more affordable forms of trading, but may also carry some inherent instability. What are commodities? How do commodities and currencies trade? What are the benefits and risks?


Investopedia defines a commodity as:

Two often-overlooked (by individual investors) forms of investing are commodities and currencies. They tend to be more affordable forms of trading, but may also carry some inherent instability. What are commodities? How do commodities and currencies trade? What are the benefits and risks?


Investopedia defines a commodity as:

A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they trade on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.

In other words, a commodity is an article of commerce or trade that is relatively uniform among various suppliers. Generally, commodities encompass things like raw materials and unprocessed food products.

They usually fall into one of two categories: soft and hard. Soft commodities include most raw food products, like tea, coffee, sugar, corn, soy, and pork bellies. Hard commodities include metals, like gold, silver, aluminum, and copper.

How Do Commodities Trade?

Interests in commodities trade in exchanges much like stocks. Buyers and sellers exchange interests in the commodities through standardized contracts. Commodities markets operate much like stock exchanges, and the government oversees them in much the same fashion. However, commodities are not as popular with individuals as other types of investment, and the exchanges and servicing companies that deal in commodities are not generally set up for the typical retail investor.

Why Invest in Commodities?

Commodities present a great opportunity to diversify one’s portfolio. They can earn high returns on investment for a savvy investor who knows how to carefully ride the rapid price fluctuations of these products. However, in order to avoid losses, one must conduct significant research on the market for a particular commodity before investing. Still, losses are possible, even for the best of researchers, because there is always a level of unpredictability in commodity trading.

Nevertheless, for investors with a high tolerance for loss, commodity investments may be worth the risk. Those investors interested in a high potential return (in exchange for a bit of additional risk) may like investing in commodities to round out their investment portfolios.


Currency trading is the process of exchanging money from different countries. The purpose of this process is to take advantage of fluctuating rates of trade. Various currencies are worth more or less when compared to other currencies, and that relative value adjusts quite frequently. Those who invest in currency exchanges purchase the money of another country while it is relatively low and then trade again when that money increases in value compared to the currency of another country.

Because the currency trade involves exchanging money from foreign countries, it is more commonly referred to as forex trading (short for “foreign exchange”). Some also call these “money markets,” but they should not be confused with the tool for short-term investing of the same name.

How Does Foreign Exchange (Forex) Work?

Forex accounts for over $4.9 trillion in trading a year, making forex the largest financial trading model in the world. However, unlike other financial markets (such as stock exchanges, commodity exchanges, etc.); forex does not rely on a central marketplace. Instead, currency trading occur electronically over-the-counter (OTC). All transactions occur via computer networks between traders around the world. As a result, forex trading can be extremely active virtually any time of day, and prices change fluidly throughout the day.

Forex trades happen in pairs, in which one buys a currency and sells another.  When taken as a pair, these two currencies make the “exchange rate.” The most commonly traded currency pairs are ‘Majors’. The four most commonly traded Majors (EUR/USD, GBP/USD, USD/CHF, and USD/JPY) account for nearly 70 percent of the world’s total daily trade in the forex market.

Different Forex Markets

While there is no central marketplace for forex trading, currencies trade in four different markets: spot, futures, options, and derivatives. In this case, the term “market” refers more to the method of transfer as opposed to the location in which such trades occur.

Spot trading involves purchasing one currency with another for immediate delivery. Most forex spot transactions settle within two days (banks take around 48 hours to transfer the funds). Anyone who has changed money before a vacation has engaged in spot trading.

Futures trading, in terms of forex, are the exchange of contracts to buy or sell a certain amount of a given currency. The trading price of the currency is set according to the price of the money on a set date. Forex futures allow investors to hedge against the exchange-rate risk and as speculation in order to earn extra profit from currency rate fluctuations.

Options trading involve the exchange of contracts whereby the buyer has the right to buy (call) or sell (put) currency at a predefined rate during a specified period. While the buyer has the right to buy or sell during a set period, there is no obligation to do so. This allows one to wait and see if conditions will occur that allow the buyer to make a profit. If they do, the buyer can exercise the option. If not, they do not have to. As a result, this is a relatively small market for forex.

Derivatives are financial instruments with a value derived from the price of some other asset, index, value, or condition. Thus, derivatives trading often require at least a basic understanding of commodities markets. Most forex trading occurs in the derivatives market. Investors use derivatives to speculate and earn profit if the value of the underlying assets moves in the correct direction.

Advantages of Forex Trading

Forex trading is appealing to some investors because of its relative speed and simplicity. Transactions can settle almost instantly and the concepts involved are easy for any investor to understand. Moreover, it is a transaction that many experience without even realizing it, like whenever they travel internationally, making it seem much more approachable than other types of investments. Still, much like commodities investing, some basic understanding of financial markets, investment strategy, and methods of exchange can prevent unnecessary losses and maximize profits.

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