The Basics of Trading Commodities
Are you familiar with the commodities market? Regardless of whether you are, your day-to-day life is bound to be affected by it in one way or another. Think about it, are gas prices the same every day? Do you ever try to guess whether they will rise or fall before you go ahead and fill your car up to full? This is a direct result of the commodities market. See, gasoline is made from oil – and who hasn’t heard about the ups and downs of oil prices? Well, as it turns out, you can trade these commodities on designated markets.
What does the commodities market include?
Well, as we know, commodities are those goods which are essentially uniform regardless of who you buy they from – there is very little, if no differentiation. These include some of the following categories:
Energy: most commonly you will find crude oil and gas, as well as other commodities used for providing energy
Metals: gold and silver are the most popular, however other valuable metals also trade here, like platinum
Livestock: this refers to animals on a farm, as well as their byproducts
Agriculture: this refers to vegetables, grains and other plant-related crops found on a farm
In fact, the most traded commodities include crude oil and related byproducts, coffee, various types of grains and other agricultural products.
Where do you trade commodities?
Commodities themselves are found on commodity and futures exchanges around the globe. Each one varies in terms of what commodities it contains. Typically, a commodity exchange will host a few different types or may even choose to focus on just a single one. Some of the top commodity exchanges are:
Chicago Mercantile Exchange (CME)
New York Mercantile Exchange (NYMEX)
London Metal Exchange (LME)
However, you can indirectly trade commodities on stock exchanges, which we will discuss shortly.
How do you trade commodities?
There are a variety of options when it comes to trading commodities. Really, it depends on what you are hoping to achieve by trading commodities. Commonly, commodities are used for the purposes of hedging risk, as well as speculation. Let’s discuss the ways to trade commodities and when each is most suitable. The first option involves derivative instruments, while the second option involves stocks.
Futures and forward contracts. Trading in this manner directly ties your performance to the price of a particular commodity. Either you are looking to speculate on the price of a particular commodity through futures or forward contracts. Or, you may be looking to hedge risk in some form or another.
When we talk about trading stocks related to commodities, we are referring to public companies whose main line of business depends on a commodity. For example, this includes companies in the oil business, or those that mine for gold. Arguably, stocks could also be used for both speculation and risk. They can be used for speculation in the sense that you invest in a particular company because you think the commodity tied to it will do well. On the other hand, you could be looking to hedge risk by investing in say, gold which reacts opposite to the overall market.
This only provides an introduction to the world of trading in commodities. You can level the stock market playing field once you know what professional traders know. Our Rich Dad Education instructors will introduce you to trading strategies that produce potential profit when stock prices are falling, and ways to lock-in gains, reduce risk, and squeeze extra money out of stocks in your portfolio.
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