- The ability to earn both growth and the fall of the market;
- Trading without actual ownership of the asset represented by the contract;
- A great way to trade according to market trends.
Commodity markets offer different opportunities for private investors. "Soft" assets (sugar, wheat, corn, etc.) have been successfully traded for centuries. This popularity is due to the possibility of their use as a tool to diversify risks.
Investing in assets that are traded contracts, you can safely be called a reliable and effective method to reduce risks. This statement does not lose its relevance even with inflation or increased economic instability. Such tools provide protection for both the buyer and the seller of contracts against serious price hikes.
The operation of the commodity market is ensured by increased seasonal volatility, unexpected and large growth in volumes under contracts, as well as the difficulty of predicting market trends. This allows experienced traders to generate a good profit due to high volatility and decent liquidity of commodity assets.
What are these assets?
Commodity assets can be divided into 2 main categories:
- "Solid" raw materials are gold, silver, and oil and ore;
- The spectrum of "soft" raw material assets is much wider (from coffee to cereals).
Solid commodity assets are so called because of the long shelf life. All the assets considered on this page, regardless of whether they belong to any particular category, are an important element of the modern economy, since they are used in the production of a wide variety of objects from technology to food.
How do commodity markets function?
The most famous markets of this type are the London Metal Exchange, the New York Mercantile Exchange and the Chicago Mercantile Exchange. At these sites, hedgers trade most often (hedge funds are asset management firms), as well as retail investors who place orders for assets to generate income from price fluctuations. Selling an asset allows you to earn income if its value falls. In turn, the acquisition of an asset allows you to earn income if its value increases.
Hedging is carried out when the participant opens a new position opposite to the position already placed. For example, a hedger who opened a long position for silver at the same time places a short position on the same asset in order to insure against the risks of possible losses. For example, airlines often use a fuel hedging strategy that trades oil and gas to limit the negative impact on price increases for these assets.
How is working with commodity assets different from currency trading?
First of all, you should pay attention to the trading time. With currencies you have the opportunity to work around the clock from Monday to Friday. In turn, commodity exchanges, most often at 5 pm in New York, no longer work. It is worth noting that at the time of the start of work of a specific site affects its location and tradable assets.
The second difference is liquidity. Currency trading is a highly liquid activity, which distinguishes it from working with goods and raw materials. The exception in this case are only gold and oil. Most commodity markets suffer from insufficient liquidity.
Most often, geopolitical events seriously affect the quotations of raw materials, while exchange rates vary depending on the economy or the status of a particular state or region. The exceptions are countries in which the economy is tied to commodities (Saudi Arabia, Venezuela, Russian Federation, etc.).
Predicting the movement of currency combinations is much easier than working with commodity assets that rise and fall, for example, due to bad weather, leading to floods or drought, or workers' strikes, etc.
With regard to currency transactions, margin requirements are less stringent. At the same time, currency traders do not need to deal with real supply. For example, when opening a RUB / USD position for 10 thousand dollars, you will not need to transfer the specified amount when opening or closing a transaction. When trading in raw materials, the situation may differ. Especially if you work with assets that require physical delivery to a specific location.
Commodities are an important element of any good investment strategy. They help diversify as well as hedge investment portfolios, allowing you to make a good profit in the long term.
For successful work with goods and raw materials, carefully prepare and study different types of assets. After that, try to understand the principles of the operation of commodity markets and their differences from trading on Forex. Only on the basis of the information gathered and its careful analysis do you draw conclusions about the readiness to use tools with an increased risk, which can clearly be called commodities.