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Why Learn How to Trade Commodities: Beginning From the Basics

enaamari by enaamari
March 15, 2022
in Business
0
Why Learn How to Trade Commodities

While it can take a lifetime to master the skilful art of trading futures markets, with guidance by experts in the field and convenient platforms like the Metatrader, one can learn to trade commodities in a few months or a year. Investing in commodities requires special knowledge about the market, changes and the process as it carries a relatively higher risk than conventional assets like bonds and stocks. As there are numerous aspects of the commodities trading market that newcomers need to understand and execute, it helps to create a timeline and work towards it.

First, Know What Commodities Are

Raw materials like agricultural products, fossil fuels, and mineral ores refer to commodities. They are different from securities like bonds, as stocks are physically present and not just financial contracts. Essentially, there are four types of commodities.

Agricultural

These include edible trading goods like grains, cocoa, rubber oil etc. In Australia, the significant agricultural commodities include wheat, sugars, honey, molasses, vegetables, fruits and nuts. It is also known for producing some of the most sustainable cotton and wool.

Metals

Metals traded as commodities include precious metals like gold, platinum, silver, palladium and industrial metals like zinc, aluminium, copper, tin and iron ore. Australia is a world leader in uranium, gold, iron-ore and coal.

Energy

The energy commodities include crude oil like coal, ethanol, natural gas, oil and renewable energy like solar power, hydropower and wind power. A total of 24% of the electricity generation of Australia comes from a renewable source.

Livestock

Livestock includes trading all live animals like hogs, cattle, buffalo, sheep, dairy and more.

An Introduction to Commodities Trading

Commodities like crude oil, iron ore and precious metals power the global economy. Their ever-changing prices allow intelligent investors to trade and profit from diversified portfolios and trading strategies. The prices of these commodities constantly shift to meet the supply and demand of the economy. The investors aim to profit from the supply and demand shifts and reduce the risk by diversifying the portfolio asset classes. One of the real advantages of learning to trade commodities is protecting assets from inflation and differentiated exposure from the market.

How Does It Work?

Commodities trading include the exchange of futures assets depending on the price of the underlying commodity. Through transacting these contracts, traders place bets on their expected value in the future. For example, if they predict the value of the commodity to go up, they would invest in them and go long, and if they think that the price would fall, they would sell the futures or go short. Today, commodities trading has expanded globally and works 24 hours every day during the workweek and reaches everyone through trading platforms like Metatrader

Different Ways to Trade Commodities

Commodities Futures

It is the most common form of trading commodities. It involves buying and selling futures contracts as a part of the exchange. Traders or investors enter into an agreement with each other on the future price of the commodity. Newcomers usually begin to learn to trade commodities through futures exchanges.

Physical Purchase

While trading futures contracts, investors do not buy or sell the physical commodity. Instead, they use online platforms to invest their money and exchange. However, some investors take the possessions of some value-dense commodities like gold and platinum.

Commodity Stocks

Commodity stock involves buying stocks of the company that the commodity is involved in. For example, investors can buy stocks from an oil drilling or refining company. Commodity Mutual Funds, ETFs and ETNs also fall into this group.

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