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
- 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
- Commodities make changing portfolio options
- Investors get brief of global markets.
- Longer market hours helps for more trading time.
- Commodities have seasonal patterns
- Lower transaction cost
- Protection against inflation
- High leverage facility
- Trade on low margin
- High returns
- High liquidity
- 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.