Can you trade commodities?
Commodities are products extracted from nature that are transformed into materials and consumer goods that can be traded. Therefore, they are consumable, transformable and tangible products. Therefore, many commodities can be traded.
Its valuation does not depend on the present and future value of the flows discounted at a required rate of return, as in the case of fixed or variable income securities, but on the global supply and demand of each raw material. Given its global nature, its price is usually expressed in dollars (money). Commodity markets help ensure some price stability, especially through futures contracts. This allows vendors to lock in the price they will receive for their product at a future date, so the price is fixed for the buyer as well.
The prices of commodities quoted in the market are often the price of their respective futures; the fixed price at which an asset will trade at a specified instant in time.
For example, we will consider products such as oil. If the supply of oil becomes more abundant but the demand remains at the same level, the price of each barrel will decrease. If there are more people using oil but producers do not have the capacity to meet this demand, the price of each barrel will rise. Oil is a very volatile commodity, widely used for trading and widely used by many traders to make money.
Where to trade commodities?
There are different ways to trade and operate in commodities.
· Spot market: Buying in the cash market, or in cash, for raw materials, means paying the producer of the asset for the immediate delivery of the physical product. The spot price is the current market price indicated.
Due to the large size of the operations and their international nature, the established standards are implemented and verified independently, so that operators can carry out the exchange without the need for a visual inspection.
· CFDs: By trading Contracts for Difference (CFDs), we can trade and deal in commodities for a fraction of the cost of owning the corresponding quantity of those physical commodities.
The idea is that it is agreed to exchange the difference in value of a particular commodity at the time of opening and closing of the position. This means that we can trade and operate both bullish and bearish.
· Futures: Investors use commodity futures either as a way to hedge their portfolios or to speculate on price movements in the underlying market. Futures dictate both the quality and quantity of the underlying: these measures are standardized so that the futures market can be traded and operated. Some contracts require the physical delivery of the raw material in question, while others are settled in cash.
Where are raw materials listed?
Commodities are listed on a number of specialized regulated markets where you can trade, such as:
· LIFFE: The largest market for raw materials in Europe, as well as other products. Specialized in agricultural raw materials. Offers: cocoa, wheat, coffee, sugar, corn.
· London Metal Exchange: The main market for metals that do not contain iron. Specialized in metals that do not contain iron. Offers: aluminum, copper, tin, nickel, zinc, lead, aluminum alloys, cobalt.
· New York Mercantile Exchange (NYMEX): The world’s largest physical commodity futures market, owned by CME Group. Specialized in energies and metals. Offers: crude oil, natural gas, heating oil, unleaded gasoline, gold, silver, copper, platinum, palladium.
· ICE Futures US (ICE): The world’s leading agricultural commodity futures and options market. Specialized in agricultural raw materials. Offers: sugar, cotton, cocoa, coffee, orange juice.
· Chicago Board of Trade (CBOT): The world’s oldest futures and options exchange, owned by CME Group. Specialized in grain. Offers: corn, soybeans (grain, oil, derived products), oats, paddy rice.
Factors Affecting Raw Materials
Political and economic factors: Although commodities are typically traded on futures prices, current economic events will affect prices and markets. For example, political turmoil in the Middle East often causes the price of oil futures to fluctuate due to supply uncertainty.
weather conditions: Agricultural assets, such as wheat or coffee, will be strongly influenced by the weather, since this controls their harvest. A poor harvest will lead to a tight supply, causing prices and markets to rise.
The dollar: Generally, raw materials are quoted in dollars (money) and move in the opposite direction to that of that currency. A rising dollar is anti-inflationary, so it puts downward pressure on commodity prices. Likewise, a falling dollar will generally put upward pressure on commodity prices.
Inflation and commodity prices: Commodities can be used as a natural hedge against inflation. If rapid inflation seems imminent, you may see commodity prices rising rapidly, which may even provide the first signs of inflation. This is because people will take money out of investments that do not offer an inflation hedge and invest it in commodity markets, to protect their portfolios.