Understanding the commodity market

A commodity market allows you to trade primary products, the stock market allows you to trade stock in companies that offer manufactured products to consumers. Think of primary products as the raw materials that manufacturers need to create the products that they sell to consumers.

CommodityNatural resources like oil are also considered part of the commodities because they are raw resources sold to manufacturers and retailers before hitting the consumer market.

Types of commodities

The simplest way to divide the commodities market is to group the primary products in terms of hard or soft commodities. Hard commodities include natural resources like oil and metals. Soft commodities include most agricultural primary products such as wheat and sugar.

You can then break this down even further to include more specific product categories. You may decide to trade precious metals, such as gold, platinum and silver. There are also other types of metals on the market, including aluminum and copper. You may trade agricultural products such as corn and wheat or venture into livestock trades that may include any animal that is raised and sold as a food source.

Energy is another popular category for commodity trades. This includes crude oil, natural gas and other natural resources used to produce energy around the world.

OTC vs. exchange commodity trades

Over-the-counter, also known as OTC, trades are spot markets designed to allow direct trades of money for primary goods. For example, farmers may participate to negotiate prices for their live cattle. Brokers are used to negotiate prices advantageous to both sides, and the sale of primary products is the result. You won’t participate in this type of market unless you are vested in the industry in question.

If you aren’t a producer ready to sell a primary product or a buyer interested in securing those products directly from the producer, then you will most likely participate in exchange-based commodity trades. These trades work in a similar fashion to equity trades with the purchase of a standardized contract. You can often trade short and utilize other strategies that you might employ when trading on the stock market or the Forex market with manufactured goods and companies.

One key difference between OTC and exchange trades is that most exchange trades don’t result in actual delivery of the primary product. OTC trades are negotiated with the intention of delivering the product to the buyer so that they can create products that are later sold to the consumer market. Equity-based trades are conducted with the intention of generating wealth, so the buyer has no intention of securing the actual product for their use.

Research before investing

The best tip you will ever receive about trading on a commodity market is to research your chosen market thoroughly. If you decide to trade in agricultural products, you need to understand the specific risks and patterns related to those products. This is similar to studying a company before investing in stock on the American stock market or doing your research on currency before entering the Forex market. You have to understand what you’re trading if you have any chance of successfully profiting from your investment.


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