Trading in commodity simply means what it sounds like. When someone tells you that they trade in the commodity market, it indicates that they buy and sell primary products or raw materials. Globally, there are more than 100 primary commodities in about 50 major markets.
This type of trading is an ideal option for you if you are willing to trade in fast-moving markets. This is especially true when you compare commodities with stocks, as you will realize the fluctuating values of the instruments.
Furthermore, the diversification of the market also creates interest among the number of traders. With so many options to trade-in, you can minimize your risk of losses by strategically investing in multiple instruments. You can categorize commodity markets into hard and soft commodities.
When you trade in hard commodities, you will be investing in natural resources such as rubber, gold, and oil. However, soft commodities are livestock and agricultural products including soybeans, coffee, sugar, and corn.
Commodities not only offer diversified instruments for trading but also create diversification in your portfolio. Because the market is volatile, you can instantly make decisions. Traditionally, commodity trading was not that interesting because you need to spend a lot of money, time, and expertise.
As a result, only professional traders find these markets interesting, but with changing times, the markets are becoming reasonably easy. Today, you can trade on different commodities from anywhere through a web or mobile application.
1. High Leverage Facility
Trading with commodities offers you high leveraged derivates such as futures and other options. That way you can enjoy high earnings and increase your assets. When you have a good debt/equity ratio, you can secure huge positions in the market. To achieve these positions you only have to pay 5% to 10% on your contract value as an upfront margin.
Following the trends will offer you exponential gains, even with an insignificant shift in the prices. So, using leverage while trading in these markets, you can increase your possibilities to create humongous returns.
The markets for commodities offer huge diversification. Also, the returns on the commodity are significantly low and have negative correlations as compared to other major classes. This indicates that with the fall in stocks and bonds, you will notice the rise in the prices of major commodities. This means that the factors affecting the prices of stock and bonds will affect the commodities differently. For instance, during a financial crisis, the stock prices will fall. But, the prices of gold will drastically rise. This happens due to the increasing demand for the safe asset. Therefore, you can improve your risk-adjusted returns because of this diversified market.
With the involvement of advanced commodities, you can conduct trades through an electronic trading platform. Consequently, it enables you to access different types of markets regardless of your location. Buyers and sellers do not intervene with the prices on these platforms, giving you an opportunity to make decisions based on a fair price.
Because the system generates these prices evaluating the supply and demand in the market, it eliminates the risk of manipulation. It discovers the price by matching the quotation of the seller and the buyer. The metrics used are the price and the quantity. Also, the buyer and seller while conducting the trade remain anonymous offering transparency in the price discovery.
4. High Returns
Another reason why you should trade with commodities is that they involve a higher volatility rate. This means that the market is consistently fluctuating. For instance, when an oil-producing country is in a war-like situation, the prices drastically increase because of a lower supply rate. You can avail of this opportunity and convert these swings into profits. In comparison with other assets, you can generate high returns with commodities.
5. Coherent Market
Commodities markets are suitable for beginners, as they are easy to understand. In order to make better decisions, it is essential to completely understand the market. Therefore, in your initial phases, joining a reputable broker will be the best decision.
When you start your career in commodity trading, you will find various options to invest in. The instant fluctuation in the market can be beneficial and threatening at the same time. For instance, during a crisis, the prices of the commodity may drastically rise. However, the uncertainty in the market due to the pandemic and weather can cause huge losses. In this case, trading with commodities can be a risky investment because you can never predict uncertain conditions.