There are many reasons global traders choose to trade commodities online. To do so successfully requires a thorough knowledge of the commodities market, the different types of commodities to trade, and what impacts commodity prices. Let’s see why trade commodities. This is what we’ll be looking at more closely below.
Understanding commodities
Commodities are basic goods (raw materials) that are used in the production of everyday goods. They are typically grouped into four categories:
- Livestock and meat (e.g., beef, bacon)
- Agricultural (e.g., grain, corn)
- Energy (e.g., coal, natural gas, oil)
- 金属 (e.g., gold, steel, plastic)
Advantages of commodity trading
There are several reasons why traders choose to trade commodities.
- Commodities are a means to diversify one’s portfolio and hedge against risks. This is because commodity prices are inclined to move in the opposite direction to other assets, e.g., stocks.
- Commodities act as a hedge against inflation.
- Commodities also act as a hedge against geopolitical volatilities that can disrupt the supply chain, leading to shortages.
- Commodities can be traded through CFDs (Contracts for Difference). This means a trader can speculate on the price movements of an underlying commodity without physically owning it. Further, CFDs also offer leverage. This allows a trader to access the commodities market using less capital but gaining greater exposure to the underlying asset. Leverage does however come with high risk and volatility. While it can increase potential profits, so too can it see you lose all your capital so caution and vigilance are key.
What are the most popular commodities?
The 4 categories of commodities are usually split into two groups, hard commodities (e.g., natural resources that can be mined) and soft commodities (e.g., resources that need to be grown).
Metals commodities
Metals are regarded as hard commodities. Some of the more renowned metal commodities include gold, silver, steel, copper, aluminium, etc. Traders typically opt for precious metals trading as a hedge against the weakening of a particular currency or high inflation. Gold in particular is considered a safe-haven asset and used in trading during the war, political uncertainty, or market volatility.
What is a safe-haven asset?
A safe-haven asset is an asset that is predicted to retain its value (or increase in value) during extended periods of market turmoil or market downswings. It is also considered a portfolio diversifier. However, the value of a safe-haven asset can vary depending on the type of down market; or may even change in value (drop) over time. Being that the value of a safe-haven asset can’t be guaranteed, proper due diligence may be useful.
Agricultural commodities
Agricultural commodities are considered soft commodities. The availability and consequent value of these commodity types is impacted by several factors:
- Population growth
- Climate change
- Environmental disasters
- War and other cross-border or civil conflicts
These variables may limit agricultural supply, providing an opportunity for investors as the price of these commodities spike.
The impact of the Russia-Ukraine War on the commodities market.
The Russia-Ukraine crisis was (and remains) a very tangible example of the impact that geopolitical crises can have on the commodities market. For example, global wheat prices for the period February 24 to June 1, 2022, increased by over 60% in comparison to January of that year. As for coal, an energy commodity, prices grew by approximately 69% during that period, evidencing the very real effect that conflicts can have on world markets.
Energy commodities
Another form of hard commodities, energy commodities have a pivotal role in the daily lives of people everywhere. Energy prices in particular impact the price of practically everything we consume, from clothing to food production, to heating (or cooling), to the cars we drive and the electronics we use. Without energy resources, much of what powers economies comes to a halt. So, what impacts the prices of commodities in the energy sector?
- New innovations in renewable or alternative energy sources (e.g., hydro, solar, etc)
- Economic volatilities
- Reduced oil outputs worldwide
- Changes to production required by OPEC
Largest consumers of energy (in exajoules) in the world
According to Statista, in 2021 the ten largest consumers of primary energy (derived mostly from fossil fuels like oil and coal) were:
- China (157.65)
- United States (92.97)
- India (35.43)
- Russia (31.3)
- Japan (17.74)
- Canada (13.94)
- Germany (12.64)
- South Korea (12.58)
- Brazil (12.57)
- Iran (12.19)
Livestock and meat
A soft commodity, examples in this category include cattle, sheep, pork bellies, etc. Fluctuations in the price of livestock commodities are typically influenced by income, the size of the population, changes in consumer habits and supply disruptions.
Commodities trading
To start trading commodities, one is required to open an online commodity trading account. What commodity to trade is largely based on expertise and skills.
Choosing a CFD broker
CFD trading on commodities is usually done through a CFD broker. A broker like T4Trade can help you trade a range of the most popular commodities. T4Trade offers an extensive range of educational resources to help you become a more strategic trader. You can also take advantage of competitive spreads and flexible leverage across T4Trade’s entire range of commodities.
Open a trading account with T4Trade
Open a trading account with T4Trade and start trading on their innovative MT4 platform, one of the world’s most popular trading platforms.
Once you’ve registered, consider opening a demo account to practice your trades in a simulated, risk-free environment, without putting your own funds at risk. The demo account provides real market conditions where you can test your trading strategies and also gain important insights into forex trading. As soon as you’ve acquired the confidence and knowledge you need to open live trades, consider moving to a live trading account.
Other reasons to register with T4Trade
Global traders choose T4貿易 due to its:
- Top tier 24/5, multilingual customer support
- Flexible leverage and low spreads
- Fast executions
- Useful trading resources
- Up-to-date economic and geopolitical news
- Daily market insights
Disclaimer: This material is for general informational & educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked, in this communication.
