Commodities trading is the buying and selling of different commodities or their derivatives with the aim of making a profit out of their price changes. Commodities are vital for human existence, and have been traded since immemorial.
On our platforms, we provide CFDs, which are contracts, based on the price of an underlying asset, that don’t grant ownership of the physical goods. This means that you don’t have to actually own the asset, yet you can trade it whenever you want. Quite convenient that you won’t have to have 100 barrels of Oil delivered to your front room! And probably not very secure having bars of Gold stored at your home! Instead, you will speculate on whether you think the price of the asset will move up or down.
In the past commodities were traded arbitrary or informally, but nowadays, they are mainly traded with standardised quantities and quality on major centralised global exchanges, such as the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), Intercontinental Exchange (ICE), and the London Metal Exchange (LME).
What Is a Commodity
A commodity is a raw good used in business. Each commodity, when traded on an exchange, must meet standards and grades. They may each be slightly different, however, ultimately are the same amongst all producers. There are 2 different kinds of commodities, soft and hard. There are mainly three types of commodities commonly traded (categorised according to their utility): metals, energy, and agriculture.
Metals are hard commodities – (mined from the ground) that are typically used in construction. Some metals commodities, such as gold, also hold aesthetic value and are used for investment purposes as well as jewellery. Precious metals are also sometimes used by investors as a hedge against inflation.
Energy commodities – are also classified as hard commodities, and they are used to generate energy that powers the global economy. Energy commodities include oil and natural gas, and they are used to power factories, facilitate the transportation of goods, and even heat our homes.
Agricultural commodities – are classified as soft commodities (grown and harvested or reared above the ground), and they are typically used as human food, with some having some industrial uses. Agricultural commodities include sugar, cotton, and wheat. Livestock and meat products, such as pork bellies and live cattle, can also be classified under agricultural commodities.
Various factors can affect the prices of commodities and contribute to their fluctuation significantly.
Supply and Demand – If supply and demand balance out, prices should stay the same. However, any time the market thinks the supply will be lower due to weather or production cuts, prices tend to go higher, and vice versa; higher supplies tent to lead to lower prices.
Stock and Inventories – Production of these commodity prices can be affected by the following; weather, crop diseases, production issues with staff, political and economic environments which form additional charges such as taxes, trade laws, subsides from governments etc.
Currency Strength – Connections between some of the worlds most traded commodities and Forex pairs are common. For example, the Canadian dollar (CAD) is connected to oil trading prices since Canada is a large exporter of oil. If you are aware of these common connections, then monitoring them and trading at the right time are important to making the right decisions in trading. It should be noted that most commodities are priced in US dollars, and thus it would be wise to monitor the dollar index in order to better forecast the price dynamics. We allow forex trading from the same trading platform, so you can use these correlations to your advantage.
Inflation – When there is inflation, the price of a commodity usually changes accordingly.
Why Trade Commodities In Australia
Having a variety of commodities in your trading portfolio can be a great addition as it brings diversity. Commodities do not pay dividends, at the same time they do not go bankrupt.
Some advantages are:
- They can protect against inflation; when economies experience inflation, the prices of commodities have a tendency to go up.
- Precious metals can be used as safe haven trades to hedge against other assets when markets under stress. Often Gold is negatively correlated to the USD and US stocks, so when money runs away from these assets, it tends to our into Gold.
- Profits can be large; Commodity CFDs are traded on margin, which means higher potential returns as well as risks.
- Low startup costs, start trading with just or try demo trading for FREE
- Trade from home or on-the-go with our leading app, AvaTradeGO
- Profit from long or short positions, meaning trade when prices rise or fall
Advantages of Trading Commodity
One of the relatively easy and low-cost ways to trade commodities is via the CFDs market. When trading CFDs, you do not own the underlying commodity, but you only speculate on its price changes. Here are some of the advantages of trading commodity CFDs:
- Leveraged Trading – CFDs are leveraged products, allowing you to boost your overall trading capital. With leverage, you can also make bigger profits out of small price changes in the market, but keep in mind that leverage increases your risks by the same multiplier.
- Buy or Sell Without Restrictions – Go long or go short according to market conditions.
- Risk Management Tools – Use limit orders and conditional orders, such as stop loss and take profit, to manage your risks in the CFD market. You can also perform hedging strategies without any restrictions.
- High Liquidity – A CFD contract is between you and your broker, which ensures that there will almost always be sufficient liquidity.
- Low Trading Costs – CFDs trades only have spread fees, which can be as low as 0.01% of your overall position.
Ready to start trading commodities with AvaTrade Australia? Register and enjoy the benefits of trading with a regulated, award-winning broker!
Main Commodities FAQs
- What are the best commodities to trade?
The most popular commodities for traders are gold and oil. This is because both enjoy excellent liquidity and sources of information. However these are not necessarily the best commodities to trade. The best commodity for any trader is the one they understand the best. One where they have detailed knowledge about the market, or about supply and demand for the particular commodity. It’s this deep knowledge that makes it easier to successfully trade any commodity. And anyone can get this type of knowledge through research and study.
- Why is it better to trade commodities with CFDs?
The traditional way to trade commodities is by using futures contracts. However this is not always the best way to trade commodities. For one thing many traders don’t have a futures trading account. And trading futures requires a fairly large upfront investment. Plus futures involve leverage, and while this can inflate gains, it can also magnify losses. All of these issues can be avoided by using CFDs to trade commodities. Liquidity is never an issue with CFDs, you can get started with a few hundred dollars, and you control the leverage, or lack of leverage, when trading CFDs.
- Is it possible to trade commodities online?
Many people think about trading commodities and they get the image of the trading pit, similar to what you see in the movie Trading Places, where Eddie Murphy and Dan Aykroyd corner the market on orange juice futures. While commodities trading may have looked like that in the past, in the 21st century it is electronic and commodities markets can be traded online from all corners of the globe. All that’s needed is a trading account with a broker that offers access to the commodity markets and anyone can trade commodities online.