Commodity trading is a kind of financial trading in which primary products, such as food, metals and energy, are bought and sold. Trading in commodities is mostly undertaken on contracts that are based on such commodities.
Some commonly traded commodities include:
Agricultural products such as corn, wheat, soybeans, cocoa and oats
Energy products such as crude oil, ethanol, natural gas and uranium
Precious metals such as gold, platinum and silver
Industrial metals such as copper, lead, zinc and tin
Commodities trading is also called futures trading. When one trades futures, s/he does not actually buy or own anything. The contract is bought to speculate on the future direction of the price of the commodity.
How is Commodity Trading Done?
Commodity is traded at organized commodity exchanges. Most of the trading involves commodity futures. Here, the underlying asset of the futures is a particular commodity, such as gold, corn or wheat.
When such contracts are bought, the buyer of the futures contract gets the right to buy or sell the underlying commodity at a specified price at a specified future date. The buyer of the contract also pays a price to the seller for this right and this is called the premium.
Some famous commodity exchanges are the Chicago Climate Exchange, Hedge Street Exchange, CME Group, Central Japan Commodity Exchange, Dubai Mercantile Exchange, Tokyo Commodity Exchange and London Metal Exchange.
Broadly speaking, there are two different types of markets for commodity trading. Spot markets are where immediate trading takes place. This includes personal purchases (like when you buy jewelry with cash) as well as spot trading on a much larger scale (like trading in oil or large quantities of gold). The other market involves future trading. Here, a contract is traded, rather than the commodity itself.
Benefits of Commodity Trading
- Commodity trading is much cheaper than stock trading, since the margins associated with the former are much lower.
- The brokerage in commodity trading is extremely low.
- Commodity trading is highly useful for speculators.
Risks of Commodity Trading
Commodity trading is highly risky and may result in huge net loss due to unfavorable market conditions. It is advisable for amateurs to first trade in stock futures before venturing into commodity trading.