The world of commodities trading is another where large sums of money can be involved. First, commodities are physical goods, which can be precious metals like gold or silver, basic metals such as copper or zinc, oil of various types such as Brent crude, agricultural products like wheat and corn, livestock including pork bellies and cattle, and other things like coffee and soybeans.
As the name implies, commodity trading involves buying or selling of products / goods or trading of contracts with an intent to take or give delivery of a commodity. Spread trading allows traders to speculate on commodity prices without actual delivery.
Commodity trading has proved to be an important investment / trading avenue for investors, especially since the exponential growth of the internet.
Origins of Commodity Trading
It is believed that commodity trading as an organized activity originated in the 1850s in the United States of America between farmers and traders. These people made agreements to buy or sell commodities at a future date (called as the Futures Contract in commodity trading parlance). Soon, speculators entered the fray as it gave them an opportunity to make profits, and commodity trading became a full-fledged trading activity.
It soon became obvious that there was a need to organize commodity trading to protect the interest of all parties involved. Commodities Exchanges Boards were established in many parts of the world to regulate the activities of commodity traders. Today, these Commodity Exchanges allow trading in many diverse commodities like oil, wheat, sugar, coffee, gold, silver, et al.
Like stock exchanges, commodity trading exchanges consists of members who themselves are traders. They usually run and support the exchange by membership fees.
Norms for Commodity Trading
It is commonsense that while trading in commodities, some standardization in the commodity needs to be maintained. For example, gold comes in many degrees of purity – 14k, 18k, 22k, 24k, etc. While dealing in gold as a commodity, the buyer and seller must know they are dealing with the same purity of gold.
Enumerated below are a few norms to which all commodities that are traded must adhere.
- The commodity that is traded must be standardized
- It must be traded frequently enough to give both the buyer and sellers an opportunity to enter and exit trades easily.
While trading in cash commodities, it should be ensured that all perishable commodities – like food grains, oil, etc. have an adequate shelf life.
Futures Commodity Trading
Futures trading in commodities is undertaken by hedgers and speculators. Future commodities have a finite time limit. Hedgers use futures commodity trading to cover price fluctuation risks or take advantage of price movements. Very often, they are people who actually deal in the underlying cash commodity. Speculators are the second group in the futures commodity trading markets. Speculators stand to gain handsomely from commodity trading as on the whole, the price of a commodity fluctuates more than that of real estate or shares.
List Of Common Commodities
You can trade many commodities online, below is an example list of the commodities list that IG Index currently offer via their spread betting platform:
- Brent Crude
- US Light Daily
- Carbon Emissions
- Heating Oil
- London Gas Oil
- Natural Gas
- No Lead Gasoline
- High Grade Copper
- London Cocoa
- New York Cocoa
- Coffee Arabica
- Coffee Robusta
- NY Cotton
- Lean Hogs
- Feeder Cattle
- Live Cattle
- NY Orange Juice
- Rough Rice
- Soyabean Meal
- Soyabean Oil
- London Sugar
- NY Sugar
- London Wheat
- Paris Wheat
- Chicago Wheat
These products are often bought and sold on the “futures market”, which basically means there is a commitment to trade the goods in a certain quantity and quality for an agreed price at a specified date in the future. They can also be bought and sold on the “spot market”, and that transaction takes place right away, for example if you buy an ounce of gold.
Fortunes can be made and lost in futures trading because the quantities involved can be significant. The futures market is standardized on certain quantities and qualities of goods with the deal coming due on a certain day of the month, and this is to facilitate easy trading on the market. As an example, “lean hogs” are traded in 40,000 pound quantities, all months except January, March, September and November, with the last trades happening on the tenth business day of the month and settlement a couple of days later.
Again, because of the size of the deals, these are traded “on margin” with only a fraction of the value having to be put up to make the trade. Once again, this exposes the trader to potentially huge losses as well as huge gains, making it a risky proposition unless you know what you are doing.