• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
WittySparks Logo White

WittySparks

Ignite Your Thoughts

  • Topics
  • Reviews
  • Services
  • Newsletter
WittySparks / Finance / Commodity Trading: Beginner’s Guide

Commodity Trading: Beginner’s Guide

Updated: July 23, 2023 by Sravan K • 3 min read

Commodity trading stockbrokers discussing and analyzing data

While most traders are largely familiar with the stock market and the Forex market, the commodity market offers great opportunities to generate profits, better diversify your investments, and hedge against inflation.

It’s an important market, with products such as iron ore, precious metals, and fossil fuels, whose price fluctuations have a significant impact on our day-to-day lives.

On this page

  • What are commodities?
  • How can you start trading with commodities?
  • What makes the price of commodities fluctuate?
  • Bottom Line

What are commodities?

Simply put, a commodity can be described as a raw material or natural resource used by individuals, companies, and governments to produce other finished goods. There are different kinds of commodities: energy such as oil, natural gas, coal, ethanol, etc.; Metals such as gold, silver palladium, copper; Livestock (cattle, sheep, hogs) and agricultural products like sugar, cocoa, wheat, cotton, etc.

Commodities can also be divided into two big categories: soft commodities and hard commodities. While soft commodities include agricultural products and livestock, hard commodities describe natural resources that can be mined or extracted from the ground, such as precious metals and some energy resources.

How can you start trading with commodities?

There are different ways you can start with commodities. You can invest in the physical form of a commodity such as gold or trade financial products on commodities via futures, options, ETFs, and shares. But one of the most popular trading vehicles for commodity traders are CFDs on commodities through online CFD trading providers like easyMarkets.

CFDs, or Contract for Difference, allows any trader to use margin and leverage trading to take advantage of larger market exposure. Moreover, you can take advantage of rising and falling commodity prices to make profits regardless of market direction. The contract is settled in cash, which means that you don’t have to deal with storage.

What makes the price of commodities fluctuate?

Every commodity has unique factors that affect its price, but some factors impact all commodities. So, let’s introduce some of the most important factors driving commodity prices today.

One of the most important factors is the supply and demand relationship. This can be influenced by many things, such as weather, market cycles, government decisions regarding policies, war, strikes, changes in consumer habits, regulation, and the health of a given economy.

As most commodities are priced in American dollars, the relationship between the American Dollar and commodity prices is important. This relationship is often described as a negative correlation, as both generally move in opposite directions. When the value of the USD increases, it takes more money for buyers in other currencies to get any commodities priced in USD, which tends to decrease its prices as the demand decreases – and vice-versa.

The weather can also influence the price of the harvested and grown commodities (agricultural commodities). Changes in the weather also impact the consumption of energy commodities in winter (heat) and summer (air conditioning).

Bottom Line

Everyone engages with commodities in one way or another in their daily lives, whether by having their morning coffee, orange juice, or hot chocolate, turning on the heat, or driving to work, which makes them valuable assets you can invest in trade in different ways. While there is no guarantee you will profit trading commodities, you can do a few things to enhance your trading performance.

First, you need to get educated to really understand how trading truly works. Then, you need to fully understand the commodity market and how you can take advantage of it. After that, you will need to determine the kind of trader you are to select the right trading style and strategy for you and the way you will analyze the market (fundamental vs. technical analysis). Finally, you will have to write down your trading plan with money and risk management rules and choose the right broker for your needs.

Related Topics

  • The Psychology Of Money By Morgan Housel Book Review
  • How Many Savings Accounts Should You Have and Why?
  • Which is better – debt fund or fixed deposit?
  • Cryptocurrency Market Analysis For Innovation

Topic: Finance

Profile picture for Sravan K Article by

Sravan K

Contributor at WittySparks
WittySparks Staff

Sravan is a Web enthusiast, who keeps on eye on all the latest happenings on web from AI to Web3, etc.

View all posts by Sravan K

Primary Sidebar

Featured Productivity Software

Notion logo
Notion

Notion Workspace can help you stay organized and take your productivity to the next level. Use Skillshare coupon code WITTYSPARKSFREE to watch the Notion Masterclass by Ali Abdaal for FREE.

Take Free Notion Masterclass

The Best Digital Marketing Tool

Semrush logo
Semrush

Semrush helps grow your business on your terms and gets to the top with 55+ marketing tools in 1. Get a flat 40% discount on Guru plan or Try 14-day PRO Trial.

Try Semrush for FREE

Footer

Explore Topics

  • Technology
  • Business
  • Marketing
  • SEO
  • View All Topics

Sponsors

Partnered with FreePik to use the licensed images.

turn to dhgate for smartphone

Affiliate Link Disclosure

If you make a purchase from links, we will receive a small commission. See our Affiliate Disclosure.

Follow Us

  • Facebook
  • Twitter
  • Pinterest
  • LinkedIn
  • Instagram
  • YouTube
  • RSS
  • Mastodon

Copyright © 2023 WittySparks - All rights reserved.
Hosted on Rocket.net

  • About Us
  • Contact Us
  • Privacy Policy