Getting Started in Commodity Trading

Simply put, commodities are the raw materials driving our world - everything from coffee beans to gold bars. They fall into two main groups:

Soft commodities

Like coffee, sugar, and soy, are agricultural goods crucial for food.

Hard commodities

Such as precious metals, coal, and oil power industry and energy. Whether soft or hard, commodities share one key trait - they're traded globally on open markets.

With trading comes profit potential, but also complexity. While supply and demand set baseline prices, various wild cards can swing costs sky-high or dirt low. For farmers, extreme weather like droughts pose major risks. Geopolitics also steer oil markets - just one conflict in a key region can spike pump prices.

What is the commodities market and how does it work?

The commodities market connects buyers and investors to trade physical goods and financial products based on commodities. There are two key types of commodities markets:

Spot market

Also called the physical market, this is where actual goods are immediately bought and sold for delivery.

Futures market

Major exchanges like CME, TOCOM, LME, and NYMEX trade standardized futures, options, and other derivatives contracts based on commodities. Over 90% of CME volume is electronic, but traders still convene on the famous open-outcry floor.

  • CME (Chicago) - Founded in 1898, today it handles billions in interest rates, equities, currencies, and commodity futures contracts daily.
  • TOCOM (Tokyo) - Japan's largest and one of Asia's top commodity futures exchanges, offering contracts for metals, oils, grains and more since 1984.
  • LME (London) - The go-to market for trading financial derivatives of metals like aluminum, copper, zinc, and nickel electronically or on its last open-outcry floor in Europe.
  • NYMEX (New York) - A CME subsidiary powering energy markets for products spanning coal, oil, natural gas, and electricity.

In summary, the global commodities market seamlessly connects physical goods with standardized financial contracts, keeping supply and demand in sync worldwide. Trillions trade hands each year across exchanges utilizing both electronic and traditional open-outcry systems.

4 Factors That Move Commodity Prices

Supply and Demand

The basic market forces of supply and demand have a major influence on pricing. As incomes rise and populations grow, demand increases - pushing prices up. Production costs and government policies also play a role.

Production Levels

The amount of a commodity hitting the market depends on Mother Nature and human efforts. Weather patterns, available farmland, trade rules, subsidies, and innovations in farming all shape supply.

Cost of Getting it to Market

Expenses like labor, materials, R&D, taxes, and fees directly feed into the price tag. Higher costs put upward pressure on prices over time.

Economic Growth

Strong economies mean people have more purchasing power. As countries develop and urbanize, consumption tends to rise fast - especially for bulk goods. Major producers and consumers can move prices worldwide.

In summary, a balanced interplay between these four forces - supply, demand, costs, and economies - determines the price level for raw materials on world commodity exchanges.

How to Trade Commodities

Commodity trading occurs via contracts for difference (CFDs). A CFD simply agrees a price and timeline for a transaction without owning the underlying asset.

For example, a gold CFD tracks price moves in real-time without holding bars of gold. Buy positions profit as prices rise, sell as they fall.

There are three main CFD types:

  • Cash CFDs - Physical delivery contracts at a set price/date for planning actual purchases.
  • Futures CFDs - Prices factor in today's spot rate plus storage until the future delivery time.
  • Spot CFDs - The current quoted price for immediate purchase/payment/delivery of a commodity.

In summary, CFDs provide a way to speculate on commodity price direction without the hassles of owning, storing or transporting physical materials. The contracts simply mirror underlying market values.

Why trade commodities?

Investors and traders trade commodities for distinct reasons. Some are attracted to the high volatility of certain commodities, which can lead to higher returns. However, the potential for higher returns always comes with higher risk. Traders might consider adding oil, gold, or copper to their list of trading instruments to expand their horizons or test their strategy on different instruments.

7-Step Guide to Commodity Trading

  1. Choose a trusted broker with your desired assets
  2. Complete a simple account verification for security
  3. Transfer funds for trading using common currencies
  4. Select a commodity like oil, gold, or crops
  5. Establish your strategy with risk management
  6. Open a buy/sell position using stops and targets
  7. Continuously monitor trades and adjust accordingly

Key Tips:

  • Always learn trading basics beforehand
  • Start with a small amount you can afford to lose
  • Use stop losses to minimize downside risk

Commodity CFDs allow anyone with an internet connection to potentially profit from global resource markets. Just be sure trade wisely with risk in mind.

Top Reasons to Trade Commodities

  • Liquidity - Large global market means easy entry and exit from positions.
  • Low Margin - Only 5-10% down opens the door to significant leverage.
  • Hedging - Producers and consumers use futures to offset pricing risk.
  • Diversification - Uncorrelated assets blend well with stock/bond portfolios.
  • Inflation Hedge - Commodity values often rise when prices are creeping up.

In particular, gold and oil serve as two of the most actively traded commodities worldwide. Their deep liquidity allows for smoother trading flows and a market less prone to manipulation. Overall, trading commodities introduces important diversifying qualities while tapping global demand for raw materials. Ready to trade your edge? You can Join thousands of traders and trade CFDs on forex, shares, indices, commodities, and cryptocurrencies.

📮FAQ

Some Frequently Asked Questions.

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A commodity's spot price denotes the immediate cash price for purchase and delivery on the spot. Transactions in the spot market are typically settled within a few days.

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A commodity's futures price is established through an agreement on a predetermined price for a future transaction. This calculation involves adding the costs of storage or transport during the interim period before delivery to the current spot price, incorporating factors such as interest, insurance, and other related expenses.

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Commodity trading can be an attractive option for beginners due to its convenience and flexibility. Online commodity trading platforms are user-friendly, providing access to resources like live quotes, charts, futures news, research tools, and online assistance through AI and automation. Axi strives to equip new traders with essential tools and knowledge for informed decision-making through courses, videos, and guides on commodity trading.

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The amount needed to begin trading commodities is determined by two factors: the minimum deposit and the initial margin. The minimum deposit is the funds required to open a trading account, while the initial margin is the amount necessary to execute and maintain an open trade. Axi's initial margin rate requirements for trading commodities typically range between 5% and 10%.

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The maximum leverage available for trading commodities depends on the trader's region and the specific regulations governing trading in that area. Leverage ratios can amplify both potential profits and losses, underscoring the importance of responsible risk management. Traders should refer to their broker's Product Schedule to ascertain the available maximum leverage.

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The risk associated with commodities trading arises from market supply and demand dynamics, which can be influenced by various factors such as weather patterns, epidemics, and natural disasters. Given the unpredictability of market trends, effective risk management is crucial for navigating the inherent risks in commodities trading.

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Explore Axi's Product Schedule for a comprehensive list of commodity cash CFDs, commodity futures CFDs, and bullion spot CFDs available for trading.

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Gain insights into gold trading and its operational aspects by learning from this guide that explains everything you need to know about gold trading.

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Discover essential gold trading strategies that can benefit traders of all levels. This guide, authored by Milan Cutkovic, provides insights into maximizing success when trading gold.

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Learn about the intricacies of silver trading and the steps involved in trading silver by referring to this comprehensive guide.

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Delve into the world of copper trading by understanding the essentials of how to trade copper. This informative guide provides comprehensive insights into the intricacies of trading copper.

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