Commodities

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Commodity trading is an activity which involves investing in anything which is categorized under commodity. The process of commodity trading is directly or indirectly affected by the demand and supply in the market. Commodity trading is often confused with stock trading simply because the process of trading is very similar. Then what is the difference between them? The major difference has to do with the difference between what is traded. Commodity trading is something which is not limited to a particular exchange. Investors are free to trade on various exchanges if they desire to do so.

In the recent times, the volumes in Exchange traded commodities have been steadily increasing. Growing importance of commodities as an asset class coupled with rapid increase in investment options has been the major trigger behind the upturn in the volumes.

There are two ways in which one can trade in commodities – One is trading in physical quantities directly, and second is trading through commodity derivatives.

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. Most commodity markets across the world trade in agricultural products and other raw materials through contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.

Why Commodity Trading?

The most important benefit of commodity trading is liquidity. The involvement of speculators means that the future contracts are reasonably liquid. However, how liquid they are completely depends on the actual contract being traded.
Apart from liquidity another important benefit of commodity trading is leverage. Leverage ensures Commodity futures operate on margin, meaning that to take a position only a fraction of the total value needs to be available in cash in the trading account.
Futures contracts can be sold as easily as they are bought enabling them a speculator profit from falling markets as well as rising ones. There is no rule like there is with stocks.

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. Most commodity markets across the world trade in agricultural products and other raw materials through contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.

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