Commodity trading | Invest in commodities

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What is commodity trading and why is it so important to traders?

Commodities are the oldest form of financial instruments. The commodity market is almost as old as human civilization itself. Historical evidence suggests that rice may have been the first commodity around 6,000 years ago. During the time of the Sumerian civilization (4,500 BC), people used clay tokens as a form of money to buy cattle.

Today, commodity trading forms the basis of the global trading ecosystem. With the advent of online commodity trading, private traders have gained access to global commodity markets with relatively modest capital.

Commodities have become a popular means of inflation hedging and portfolio diversification. For many traders and investors, commodity trading is a preferred way to protect funds and reduce overall risk to their portfolios.

What are the main commodities?

Generally, products can be divided into four main categories:

  1. Agricultural products, including food crops (cocoa, cotton, corn, coffee, etc.), livestock (pigs, cattle) and industrial crops (including wool and timber).

  2. Energy products, including natural gas, crude oil and gasoline, coal and uranium, ethanol and electricity.

  3. Metal products, including base metals (ie iron ore, zinc, aluminum, nickel, steel, etc.) and precious metals (gold, silver, palladium and platinum).

  4. Environmental products, including renewable energy certificates, carbon emissions and white certificates.

Some believe that cryptocurrencies – a unique and extremely popular asset class – can also be referred to as commodities. Although the Federal Financial Market Supervisory Authority (FINMA) and the United States Securities and Exchange Commission (SEC) tend to regulate cryptocurrencies like stocks, many see real-world commodities as good. best analogue for crypto.

Proving this theory, Bitcoin is called “digital gold” and many cryptocurrencies are “mined”. In essence, cryptocurrencies, like commodities, are free from outside control and their values ​​are defined by market factors. In addition, cryptocurrencies can also be exchanged for commodities and speculated. That said, let’s put them here:

5. Crypto-currencies, including Bitcoin, Litecoin, Ethereum, Ripple, Monero, and many more.

Why trade commodities

There are several main reasons for trading commodities:

The presence of commodities in an equity portfolio can reduce volatility due to the lack of direct correlation between commodities and other asset classes.

Commodities can serve as a safe haven in times of global economic uncertainty and market turmoil because they can retain their physical value.

The intrinsic value of commodities is independent of currencies. They will often hold their value, even if a currency falls during a period of inflation.

Commodities can be very volatile, experiencing sudden price fluctuations. Trading CFDs on commodities is one way to try and profit from large price fluctuations.

Commodity trading requires careful consideration due to the occasional high volatility in the market and a wide choice of instruments available, from derivatives such as futures and CFDs to stocks of commodity-producing companies.

With commodities, the possibility of making large profits goes hand in hand with the risk of large losses. The price of raw materials can be very difficult to predict. The price can change abruptly due to several factors, such as weather conditions, political unrest, and strikes. Unlike stocks, there are almost no fundamental financial metrics like price / earnings ratios, interest rates, etc.

How to trade commodity CFDs

One of the easiest and most popular ways to trade commodities is with CFDs. A contract for difference (CFD) is a type of contract between a trader and a broker in an attempt to profit from the price difference between the opening and closing of the trade.

Investing in commodity CFDs saves you from having to pay for the storage of commodities, in case of physical delivery. Using CFDs to trade commodities will allow you to go long or short without having to deal with conventional commodity exchanges, like CME, ICE or NYMEX.

Additionally, CFDs give you the ability to trade commodities in either direction. Whether you have a positive or negative view of commodity price predictions, you can try to profit from future upward or downward price movements.

Additionally, commodity trading via CFDs is often commission-free, with brokers making a small profit on the spread – and traders trying to profit from the overall price movement.

Another good thing for you is that CFDs are a leveraged product. For example, a 10% margin (the number may vary depending on the commodity and CFD broker) offered by Capital.com means that you only need to deposit 10% of the total value of the trade you want to open. The rest is covered by your CFD provider. In this case, if you want to trade for, say, $ 1,000 of a CFD on a particular commodity, and your broker demands a 10% margin, you should only spend $ 100 to open the trade.

Why trade commodity CFDs with Capital.com?

Advanced AI technology at the core: A Facebook-style news feed offers users personalized and unique content based on their preferences. If a trader is making decisions based on bias, the innovative news feed offers a range of materials to get them back on track. The neural network analyzes behavior in the app and recommends videos and articles to help you refine your investment strategy. This will help you refine your approach when trading commodities.

Trading on margin: Through margin trading, Capital.com gives you the ability to trade CFDs on commodities and other most traded commodities even with a limited amount of funds in your account.

Negotiate the difference: By trading commodity CFDs, you are not buying the underlying asset itself. You are only speculating on the rise or fall of a particular commodity. CFD trading is no different from traditional trading in terms of the associated strategies. A CFD trader can take short or long positions, set stops and limit losses, and apply trading scenarios that match their goals.

Complete trading analysis: The browser-based platform allows traders to shape their own market analysis and forecast with stylish technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS and Android.

Focus on security: Capital.com places particular emphasis on security. Certified by the FCA and CySEC, it complies with all regulations and ensures that the security of its customers’ data comes first. The company allows customers to withdraw money 24/7 and keeps merchant funds in separate bank accounts.

Top 5 World Commodity Exchanges

The advent of online trading has had the greatest impact on the commodity futures markets. Physical trading rooms have been replaced by electronic marketplaces. Today, millions of people around the world have access to commodity futures exchanges in different parts of the world.

To exchange

Based

The description

Chicago Stock Exchange (CME)

1898

The US Commodity Derivatives Exchange, which offers the widest range of futures and options. Originally, it was a dairy exchange – the Chicago Butter and Egg Board.

Chicago Chamber of Commerce (CBOT)

1848

The world’s oldest futures and options trading exchange. Since 2007 operates as a subsidiary if the CME group.

New York Stock Exchange (NYMEX)

1882

The world’s largest physical commodity exchange. In 2008, NYMEX was acquired by the CME group. It also operates COMEX, the world’s leading metals exchange.

Intercontinental exchange (ICE)

2000

Launched as an exchange for energy markets, ICE is an electronic exchange for global commodities and OTC products.

London Metal Exchange (LME)

1877

The UK stock exchange, offering futures and options primarily on base metals.

Raw material price history

Historically, each individual product has different factors that influence its price. However, certain general factors have always played an important role in the formation of commodity prices.

  • Demand from emerging markets. Fast-growing economies, like China and India, have a growing need for raw materials and commodities to feed people, build the necessary infrastructure, and power their homes and factories. Demand from emerging markets has the biggest impact on commodity prices.

  • Stationery. The abundance or scarcity of raw material supplies can also lead to large price movements. Environmental, social and political issues in major producing countries can impact the supply of raw materials and lead to price fluctuations.

  • The American dollar. Preserving the status of global reserve currency, the USD can also influence the direction of commodity prices. When the dollar is strong, commodity sellers get less dollars for their product and vice versa.

  • Substitution. When the price of a certain product goes up, buyers try to find cheaper substitutes, if available. For example, cheaper aluminum can often replace copper in different industrial applications.

  • Weather situation. Many types of products are highly dependent on weather conditions. For example, severe drought or excessive rainfall can ruin crop supplies. Storms, hurricanes and extremely cold temperatures can increase the demand for heating and push up the prices of energy products, such as gas and oil.

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