Learn About Commodities Trading

Commodities Trading is one of the oldest form of trading. From ancient times people exchanged goods to earn a living. Today, Commodities trading has been made a lot easier for those who are interested in the buying and selling of goods. Tradable commodities are divided into hard(mined goods) and soft commodities (Agricultural goods). Items such as gold, silver, platinum, crude oil, brent, wheat, Soya bean are some of the most common commodities you will see often when watching business news. Trading usually occurs on the Spot or Futures Market. The spot market initiates delivery immediately while the futures market initiates delivery at a future specified date. Thus, you can easily cancel and order anytime you choose.

SO HOW ARE COMMODITIES TRADED?
For retail investors such as you and me the most common way of trading commodities is via the futures market. Trades are made buy agreeing to buy or sell a particular commodity at a particular price at a specified future date. For example I can a place an order today to purchase 10 future contracts of crude oil at 50$ per barrel a on the first day of month. You only make a loss upon offsetting (That is confirming debit of your account). On the spot market though, Orders are traded immediately such that your loss or profit is shortly realized thereafter. Kindly take a look at a sample trading session.
From the link you can see that trading is similar to Forex, and other charted trading instrument. As a matter of fact some commodities can be traded against the dollar side by side on Forex Platforms. eg Crude oil, Gold and Silver.

WHAT ARE THE BENEFITS OF TRADING COMMODITIES
Now that we know what commodities are all about. what are the benefits?
Some commodities are safe havens: Commodities such as gold and food Items are safe havens in times of economic crisis as these are more tangible than currencies. Hence, you can choose to move some of your riskier investments such as stocks towards commodities in times of crisis.

They have large profit potential: The high leverage(Borrowed amount) involved in commodities trading allows for large return on investments. Some trades are known to make up to 10% per trade/contract.

They can be traded more easily with Technical Analysis: Majority of trades placed on the commodities market are placed manually by traders. This allows for smoother trends and predictable analysis as human psychology is involved.

They have low volatility as compared to Forex: Commodities in the futures markets are hedged. Thus, sudden large market fluctuations as seen in more volatile markets are readily predictable.

Their demand and supply can easily be tracked:  The goods in the commodities markets are easily tracked for instance you can easily determine the amount of wheat consumed or produced in the world today. The availability of these easy to find information allows traders to be able to analyse where price is going to go in the near medium to long term. For instance, the demand for oil is currently being expected to reduce as greener alternative energies are currently being promoted.

They hedge Inflation: Because the cost of goods is tied directly to the rise and fall of inflation, a rise in inflation is often resulting from a rise in the price of goods. As a result, having these instruments in your portfolio guards against the effect of inflation on your local currency.


DISADVANTAGES OF COMMODITY TRADING

Transaction Speed– The speed of of execution of commodities trading is less than those of stocks and other instruments in the financial market. If you are a fan of high speed trading the commodity market may be too slow for you. Online platforms have however increased made things better in recent times.

Leverage –Leverage increases risk by increasing the size of your position, thus your losses and profit are magnified. The availability of leverage allows traders to sometimes over trade as the can fall into the trap of trying to quickly grow their account.

Risk of Physical Delivery – Purchased commodities can actually be delivered to your door step although as stated by FX Empire Analyst - Irit R. 

Most Futures contracts are just settled through cash once the tenure of the Futures contract has expired.'

WHAT IS THE MINIMUM CAPITAL REQUIRED FOR TRADING COMMODITIES.
The minimum capital for commodities ranges from $3000 to $25000. Due to margin requirements required by the security, some commodities such as Crude Oil can require higher minimum capital.

WHAT DO I NEED TO TRADE COMMODITIES
To start commodities trading you need the following

1. To sign up with a commodity broker
2. Fill your details, i.e address, account details etc
3. Get a good platform to trade

Note: Some brokers may reject your application. Should this be the case you can easily open an account with another broker


In Conclusion,
Commodities are assets one has to have especially for the hedging effect it has against inflation. As a beginner trading items such as gold, oil, corn may be easier for you to track. If you are reluctant to learn commodities trading you can opt to buy a Specialty Mutual Funds that already has a collection of profitable commodities. Learn about them here. There are also Exchange Traded Funds that you can choose to trade. This are easier to track than trading commodities individually.