Trading commodities is complex and requires a lot of upfront work to make sure you fully understand the underlying concepts. You purchase and use commodities every day, but do you understand them as an investment? What forces drive commodity prices? What are the different varieties of commodities? What are the risks of trading them?
Commodities as an Investment
A commodity represents an article of trading or a product that can be used for trading on an authorized commodity exchange. Commodities include products like corn, wheat, gold, and oil. Nowadays, it is rare to find such materials in their raw state, since they are often already processed before ending up in international markets to provide a standardized quality to the products sold, as well as to facilitate transportation.
Types of Commodities
There are 6 major categories of commodities:
- Agricultural products: wheat, corn, palm oil, soybean, etc.
- Exotic products: cotton, tea, cocoa, sugar, etc.
- Metals and minerals: copper, lead, tin, aluminium, gold, silver, platinum, etc.
- Energy products: coal, gas, oil, etc.
- Livestock products: lean hog, live cattle, etc.
- Products used by industry: wood, wool, etc.
Which Commodities Can be Traded Online?
Today, more and more brokers, such as UFX, offer their clients the option of trading commodities, as they are among the most actively traded products in the world, thanks to the recent industrialization of commodity-dependant countries, such as China and India. Commodities also play an important role as safe-haven assets, particularly precious metals like gold.
Among the commodities described above, most brokers will allow you to trade on precious metals, energy, and agricultural products. Gold, silver, and oil have the biggest trading volume, as they are the most common products traded by commodities traders.
Trading Commodities Online
As with any asset, prices are driven by supply and demand. Investing on commodities is not without risks, as their prices can be affected by various factors which are often difficult to forecast, such as the weather or natural disasters. There are three main kinds of derivatives on the commodities market – contracts made between two or more parties who agree on the value of the underlying asset: futures and forwards, options and OTC products. Be sure to ask your broker any questions about trading commodity products before getting started.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.