A commodity trading is an individual or business that focuses on investing in physical substances like oil, gold, silver and more. The day-to-day buying and selling shares expect economic trends in the commodities markets. Commodity markets typically trade in the primary economic sector, industries focused on collecting for profit. You need to be fast enough to react such order to trade profitably, slow reactions can result in losses if the market takes a turn in the other direction.

Types of Commodity Markets

Commodities trade either in spot markets or derivatives markets. Spot markets are referred to “physical markets” where buyers and sellers exchange physical commodities for immediate delivery. Derivative markets involve forwards, futures, and options. Forwards and futures are contracts that use the spot market. These contracts give the owner control at some point in the future, for a price agreed on today. When the contracts expire, the commodity or other assets take place, and closes the contract in order to avoid making late delivery. Forwards and futures are generically the same, except that forwards are customizable and trade over-the-counter (OTC), whereas futures are standardized and traded on exchanges. There are more than 50 known commodity markets globally. These markets facilitate investment trading in around 80 different primary commodities. There are many ways to invest in a commodity market, but the most direct way is to buy into a future contract. This is a contract where a trader buys or sells a certain commodity at a specified price on a future delivery date. There are three crucial players that make commodity trading.

  • Commercials: These are the system that are involved in the processing, result, or merchandising of a commodity.
  • Large Speculators: Here, a group of investors who have shared their money with, reducing their risk and increasing their gain. Similar to mutual funds, these speculators have money who help them to make their investment decisions.
  • Small Speculators: Small player are the individual commodity traders who trade via a commodity broker or through their own accounts. Both major and small trader have the ability to heavily affect the commodities market.

What is Commodity Currency?

A commodity currency is a currency from countries with large amounts of commodity reserves, such as Canadian CAD, Australian AUD, New Zealand NZD, etc. Commodity currency countries have a heavy need for the export of certain raw materials. Commodity currencies are tied to commodities and falling, or rising exports will lead to deflation or inflation: currency prices will go up or down.

Let us find some examples.

Commodity Trading Benefits

  1. Commodities make changing portfolio options
  2. Investors get brief of global markets.
  3. Longer market hours helps for more trading time.
  4. Commodities have seasonal patterns
  5. Lower transaction cost
  6. Protection against inflation
  7. High leverage facility
  8. Transparency
  9. Trade on low margin
  10. High returns
  11. High liquidity
  12. Hedge against risk

Example 1: Commodity price goes down or up

New Zealand dollar, Australian dollar, Canadian dollar, South African rand, Brazilian real, Russian ruble, etc. are some commodity currencies. Some of these countries are developing countries or strong export countries for example, oil is an exchangeable commodity, which means that specific grades of oil are similar for oil trading purposes, anyhow of where they were produced. If the oil price starts to rise, demand rises– Canada will profit, and CAD will go up.

The price of any commodity or service is determined by supply and demand, so very often, supply and demand are important for commodity currencies.