Commodity trading is one of the oldest professions in the world. Before we started using the money system, our ancestors traded commodities for their keep.
But today, commodity trading changed a lot. And it’s still growing.
If you’re thinking of trading commodities, you need to know the following first. They will help you get a heads up for when you want to dive deep into the market.
Nearly Anyone can Participate
You don’t need to be a professional commodity hustler to trade commodities. Nearly anyone can participate in the commodity trading.
The only obvious requirement is the knowledge and education about commodities. You don’t have to have a formal schooling before you can trade.
All that you need to have is the knowledge and the understanding of how the broader market works. Try to learn about the market’s behavior and the pros and cons of trading with it.
Then, dive into the commodity you’re trading, whether it’s oil, soy, wheat, precious metals, or base metals.
Two Types of Commodities
Although there are a lot of different commodities, you can generally categorize them into two types: the hard and soft.
Hard commodities are natural resources that have a massive importance in the economy’s health. One good example of this is oil.
Oil is somewhat of a rock start in the commodity market. Countries fight for its import and export. Whenever there’s a huge change in price of oil, other markets react. The same is true, too, when there is sudden news like wars or geopolitical tensions; oil reacts.
Soft commodities are those livestock and agricultural goods and they are more flexible.
There’s always demand for these products. It’s also easy to grow and supply these commodities. One big nuisance, however, is the weather.
Knowing which type of commodity you are trading will let you know how to position yourself in the market.
You cannot Trade Some Commodities
Obviously, there are commodities that are not tradeable, such as:
- Carbon dioxide
Commodity Trading Standards
When you start trading commodities, you also need to know about the commodity trading standards that the market follows.
For instance, you cannot trade certain types of commodities without them undergoing inspection. These standards exist to protect the trader and the consumers.
Different countries have different commodity trading standards. So, wherever you are, make sure you know the standards active in your location before trading.
Arguably the best way to start trading commodities is trading commodity futures. These are contracts to buy or sell commodities for a certain price in the future.
Commodity futures trading offer different advantages to your capital. It’s flexible and allows you use many different strategies to gain profit.
You can also use stocks to gain exposure to the commodities market. A lot of companies deal with commodities like oil and gold for their business processes.
Most of the time, when the oil market moves, these stocks move along with it. You can search for the stocks of big oil companies and you’ll see that they are where the commodity and stock market converge.