The commodities market is as old as the world of trading itself. Evidence of commodity trading stretches back to the ancient civilisation of Sumer in southern Mesopotamia, modern-day Iraq, with the trading of clay tokens in exchange for goats.
Although Sumer is now ancient history, the practice of commodity trading has been ingrained in society with the commodities markets becoming part and parcel of human lives.
A number of commodities markets have evolved throughout history: the trading of livestock, such as reindeer in Siberia, cowrie shells in China and Africa, as well as gold and silver, traded today.
But, with history behind us, itís time to move on and get to grips with modern commodities markets, what it means for consumers and how you can benefit from them.
What are commodities?
Letís start with the basics. Commodities are physical assets that are partially or completely fungible., For example, one barrel of oil is equal to another barrel of oil, regardless of whether it was produced in Russia, America or any other country. Commodities can be traded for another asset or for money.
Although there are many types of commodities, generally they fall into one of four distinct categories:
1. Agricultural commodities Ė harvestable products such as wheat, cocoa, coffee, cotton, orange juice, and sugar etc.
2. Livestock and their produce Ė this includes cattle, sheep, goats, pigs and their products such as milk and meat.
3. Metals Ė precious materials such as gold, silver and platinum. Also includes rare earth metals that are used in a number of modern technologies.
4. Energy Ė the fossil fuel sector, including crude oil and natural gas.
How does the commodity market work?
Small-scale commodity trading continues and thrives in almost all societies, but commodity trading has gone global. Commodities are now traded on international exchanges such as the New York Mercantile Exchange or the London Metal Exchange, to name a few.
Trading in a commodity market can take many forms, such as the buying and selling of commodities through direct sales, exchanges of commodities, futures contracts, derivatives contracts such as CFDs and more.
The one thing they have in common is they are based on the price of the commodity involved. Commodity prices are influenced by a number of factors.
1. Supply and demand
For example, an abundance of oil may cause its price to drop, but a restriction in supply could herald a rise. The same goes for demand. A decrease in the popularity of gold means that its price could fall, an increase in demand could cause a rise as the commodity is more sought after.
2. Physical logistics
Commodities as assets are heavily influenced by physical logistics. This means the transportation and storage of such assets.
3. Market and other conditions
As assets, commodities are heavily influenced by external factors. For crops such as wheat or sugar, this can be environment factor such as too little or too much rainfall. For oil, it can be political factors such as disagreements between Russia and the West. Commodities are susceptible to volatility, which present both opportunity and risk for traders.
How are commodities measured?
When trading commodities, itís important to know how they are measured. Each commodity has a specific unit. For oil itís barrels, for gold itís troy ounces, for wheat itís bushels. When a commodity is bought or sold, the value seen on the exchange is the value for a set amount of the commodity.
Here are some of the most common:
|Wheat||5,000 bu (bushels)|
|Coffee||37,500 lbs (pounds)|
|Sugar No. 11||112,000 lbs|
|Lean hogs||40,000 lbs / 20 tons|
|Live cattle||40,000 lbs / 20 tons|
|Feeder cattle||50,000 lbs / 25 tons|
|Crude oil||1,000 bbl (barrels)|
|Brent oil||1,000 bbl|
|Natural gas||10,000 mmBTU|
Now that you know a little about how commodities are measured, you can begin to explore the live commodity prices and see how the commodity markets move in real time.
What effect do commodities have on your finances?
Commodities are the coffee you drink at breakfast, the oil or gas used to heat your home or fuel your car, the gold rings on your fingers, and so on. Their prices have a direct effect on your life.
Knowing how the commodity markets are moving is not only helpful for would-be traders, but also those looking to get more involved in financial planning.
Rising prices of oil may indicate an upcoming increase in car fuel prices, so it may be best to fill up the tank now rather than wait for next week. Or perhaps, gold is falling. That means the ring youíve been saving for may be available at a lower amount in near future.
That said, while itís true that commodities do affect our finances, from more expensive coffee to a higher price for a tank of fuel, the impact is not always so direct and it can be hard to predict when these changes will hit the consumer.
How can you trade commodities?
If knowing about how commodities work isnít enough, perhaps you might want to consider trading. Long gone are the days when only large corporations could invest in commodities. Now, thereís no need to even own the asset youíre trading, let alone store it.
For the average trader looking to invest in the commodities market, CFDs present an excellent option to delve into one of the oldest markets without the bother of storage or the need to commit to any one market.
CFDs are contracts for difference, wherein a trader speculates on the price movements of the market they are interested in Ė gold, oil, gas etc. To do this they open a position with a broker who allows them to take a long position (buy) if they think the price is going to rise or a short position (sell) if they think the assetís value is going to fall. If the trader is correct, they profit from their trade, if not they incur losses.
As CFDs are leveraged financial products, meaning that a trader only needs to put up a small percentage of the investment to trade, they carry a risk of loss of profit higher than the initial deposit.
CFD trading, while risky, presents traders with opportunities to profit from both price rises and falls, whilst having the ability to trade across a variety of commodity types, depending, of course, on the liquidity of the traderís account.
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