Read ahead to discover how commodities are defined and classified and which commodities are the most popular by traded volume.
Why Trade Commodity CFDs?
Commodity Trading Conditions
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Commodity Trading FAQ
Why should you consider trading commodities?
There are three main reasons why you should consider looking at commodities markets:
- Portfolio diversification,
- The negative effect of psychological bias
- Higher volatility.
Portfolio diversification: A diversified portfolio across different asset classes are viewed as beneficial in terms of mitigating risks and providing a more balanced approach to investing and (to a lesser degree) trading.
Avoiding the ambiguity effect: The ambiguity effect is when you favour something familiar over another choice where the risk is less known. Because you understand another asset class and its potential returns better than, for example, commodities, you may avoid trading in a particular instrument — even though trading in them could potentially produce a better return. By educating yourself to the world of commodities and commodity trading you introduce new ways to diversify your trading.
Higher volatility: Generally speaking, many commodity markets exhibit a more volatile nature than stock indices and Forex markets. Daily price movements in commodity markets tend to be higher. This affords the leveraged trader more scope to make higher gains. If your trading style benefits from higher volatility, then commodity markets could be right for you. However, it must be remembered that with higher volatility comes potentially higher risk and the possibility of larger losses. Also, commodity markets won’t be as attractive if your trading style doesn’t benefit from higher levels of volatility.
Major market participants in commodities trading include commodities buyers and producers, investors, and speculators. Markets and exchanges were established initially to allow commodity producers and users of those commodities to exchange the commodity. As markets and exchanges have evolved to accommodate potential volatility of price movements, investors and speculators have become the major participants in commodity markets.
The rate at which you can sell the base currency, in our case it’s the Euro, and buy the quote currency, i.e the Japanese Yen.
Ask (or Offer)
The rate at which you can buy the base currency, in our case the British Pound, and sell the quoted currency, i.e. the Japanese Yen.
The difference between the Bid and the Ask prices.
The value of one currency expressed in terms of another. Its fluctuation depends on numerous factors including the supply and demand on the market and/or open market operations by a government or by a central bank.
Usually contract size is based on a lot system, and for most currency pairs 1 lot is 100,000 units of a base currency.
Minimum rate fluctuation
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Commodities fall broadly into two categories: hard and soft commodities.
- Hard commodities: These are natural resources extracted from the earth such as precious metals (gold and silver), base metals such as copper and aluminium, plus energy products, such as oil and natural gas.
- Soft commodities: Soft commodities (often described as “softs”) are broadly comprised of livestock and agricultural products. Livestock can include pork or live cattle. Agricultural (or “ags”) can include wheat, cocoa, sugar and soybeans.
Supply and demand: All markets are driven by the dynamics of supply and demand for the asset being bought and sold. In commodity markets, however, this is even more pronounced. A significant rise (or fall) in demand for any particular commodity will likely give rise to a notable rise (or fall) in the price for the commodity. Conversely, changes to the supply dynamics for a commodity will do the reverse.
The US Dollar: Most commodities are quoted and traded in US Dollars. This means that changes in the value of the US Dollar against other currencies can impact the price of commodities. Generally speaking (though this relationship can shift), there is an inverse correlation between the value of the US Dollar and the price level of commodities.
Global economic conditions: The health of the global economy can have a significant impact on the overall demand for, and supply of, various commodities – therefore impacting the price.
There are now more than 50 global commodity exchanges trading in over 100 commodity types. These exchanges offer futures contracts primarily, with commodities as the underlying asset.
- The Chicago Board of Trade (CBoT) has been in existence since 1848 and offers trading in soybeans, wheat and corn, amongst many others.
- The Chicago Mercantile Exchange (CME) facilitates trading in lean hogs, cattle and lumber, with many other markets also listed to trade.
- The New York Mercantile Exchange (NYMEX) sees trading in gold, silver and other precious metals plus many others.
- The London Metals Exchange (LME) sees trading in base metals, including copper, aluminium, lead and zinc.
- The Tokyo Commodity Exchange (TOCOM) allows for trading in a wide variety of commodities.
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Gold is a commodity, and a commodity is a good that is characterised by a lack of significant differentiation between the goods supplied by any