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Commodity Trading Explained

One of the important rules of trading is that you should diversify your assets. What better way to diversify them than through commodity trading?

Commodities are all around us and are a large part of the life of everybody around the world – from the oil we use in our car to food products made from soybeans, cocoa and corn. That makes commodity trading a great investment channel when you want to diversify your portfolio or when you just want a place to put your cash in times of volatility in the stock market.

Types of Commodities

Traders looking to get into commodity trading should know the four types of commodities today. These are:

     Energy (e.g. crude oil, natural gas, gasoline and heating oil)

     Livestock and Meat (e.g. lean hogs, live cattle and feeder cattle)

     Metals (e.g. gold, silver, copper and platinum)

     Agricultural (e.g. corn, wheat, soybeans, rice, cocoa, coffee, sugar and cotton)

In times of economic or geopolitical turmoil, traders usually flock to precious metals such as gold which is seen as a safe-haven commodity due to being historically seen as a reliable metal in such times.

Agricultural products have an active trading market behind them. Agricultural commodities usually become volatile in summer.

Energy is one of the most common commodity traded in global financial markets. Occurrences and developments, such as the on-going production cut by the Organization of Petroleum Exporting Countries, should be considered whenever trading energy commodities.

The Commodities Markets

Commodities markets, just like other markets are usually driven by supply and demand.

If the supply is high, the demand is low which decreases the price and if the supply is low, the demand is high which means higher prices. Events such as a drought could potentially affect the supply of agricultural commodities thus increasing demand and, thus, prices. Global development and advances in technology also have an effect on prices.

 Where to Trade Commodities

There are several commodities exchanges in the world. Some of them focus on one commodity while some allow a variety of commodities to be traded. For example, the London Metal Exchange, most obviously, only has metal commodities.

Over in the United States, the most popular commodities exchange are those under the CME Group. The CME Group was a result of a merge between the Chicago Board of Trade and the Chicago Mercantile Exchange in 2006.

Commodity exchanges have set standards which traders must follow. This is to avoid buying commodities that are sub-par in quality.