Trading commodities is the name given to the process where products are bought and sold, where they are taken from the ground. For example, the major commodities are gold, silver, oil and platinum. There are also products derived from those listed here, such as natural gas.
The term can also include trading based on agricultural products which have economic value. These things would include wheat, coffee and corn, plus others. Again, derivatives of these products, such as sugar, would also count. The major principle behind the trading of commodities is similar to the process behind stocks and other financial products. It covers the changes that take place in the perceived value by farmers, traders, and speculators. The price is determined by the perceived value of the players listed above, as well as the demand which the commodity is currently experiencing (which also determines the price).
How Commodity Trading Take Place
Commodities are traded on both a spot and futures methodology.
On the spot means that the thing is bought or sold but no physical exchange takes place. This is usually where traders buy or sell and then make their profit based on the price differences (from on the spot commodity platforms). There are now a great deal of Forex brokers who use commodity instruments with their assets.
The trading of commodity futures is different in that it involves the trade of options contracts. However, here there could be an exchange of commodities involved (but not in every case). This is the same trading method that was used many hundreds of years ago, and the idea behind futures trading was to bring a form of standardization to the exchange process. This is because many of them were perishable goods, and would fluctuate in price and value. This was why a farmer wanted to be sure he would be guaranteed a certain price by a trader, and why he would enter in to a contract. This would provide a guarantee of price, while in return offering a certain quantity for the commodity. It was also a good deal for the dealer, as they could be sure they were getting a certain quantity without worrying about paying more than the market value, if inflation was to take place, or should a natural disaster take place. As such, the purpose behind this concept was to benefit both sides, so each party was dealt with in a fair manner.
Commodities are traded on the binary options market and as Exchange Traded Funds (ETF) on the American Exchange (AMEX) as well.
Trading of commodities happens at the exchange of the Chicago Board of Trade (CBOT), on ICE (energy futures such as natural gas futures) as well as at the New York Mercantile Exchange.
As with Forex trading, the commodity broker aims to bring together both a buyer of a commodity, and a seller of that commodity. The buy and sell orders will be matched by the brokers.
Traders require much more capital to trade commodities than they do for Forex, based on the requirements of liquidity. This is the reason that many Forex brokers who have commodities as additional assets, only offer small contracts for traders. It is common to see movements of 0.25 to 0.5 pips per tick, but this will be based on the size of the contract (mini or full). During very large contracts, leverage is given to the trader by brokers.
Process for Trading Commodities
Firstly, a broker is required in order to get a trading account. An online form must be completed by the trader to open an account. This will include a lot of proof, such as address, bank statements and personal identification. The account will also need to be funded once it has been successfully opened and activated. There are a number of Forex brokers who offer gold, silver and crude oil trading these days, and they have become the most commonly traded commodities. There are others who offer full and mini contracts straight.
There are a number of ways of trading. Virtual platforms can be used, as well as just trading through brokers via the open outcry system on the commodities exchange floor in Chicago. There is something for every type of person, and most people can get involved in trading commodities. Lots of beginners like to trade commodity binary options. Likewise, experienced traders prefer to trade options and futures contracts.