Image: Oil pump extracting one of the most traded commodities.
Commodities are raw materials — copper, wheat, oil, etc. Alongside corporate stock, bonds, and real estate, they are considered a major asset type. However, unlike other assets, commodities are not always a particularly good investment. Instead, their primary use is in trading — and they make for a unique trading asset.
Commodities — A 350 Words Crib Sheet
Commodities are different from all the other major asset types. There isn’t really anything quite like them, so you need to keep in mind those differences when trading commodities.
Commodities are fungible. This means that they are interchangeable inside the same grade. For example, .925 silver produced in Egypt is just as valuable as the .925 silver produced in China. Past events have showcased that usually when one supplier increases the price of a commodity, consumers at least consider switching to another one, instead of accepting the new price.
The price of a commodity depends on the market. For example, an investor will have a hard time trading rice on the Shanghai Exchange, which traditionally specializes in hard commodities (more on that later). On the other hand, the Chicago Mercantile Exchange provides much better conditions for rice trading.
Types of Commodities
There are several ways to classify commodities. The most common one is by category — Metals, Energy, Agricultural Produce and Livestock. Yet there is no official classification, and a lot of economists use their own.
Image: Components of the S&P Goldman Sachs Commodity Index.
For example, S&P Goldman Sachs distinguishes 5 classes of commodities for their commodity index:
1. Industrial metals like iron or aluminium;
2. Energy (coal, oil, natural gas);
3. Precious metals (gold, silver, platinum, etc.);
4. Livestock (including meat and meat-based products);
5. Agricultural produce (wheat, rice, cocoa, etc.).
However, most traders should start with a simple differentiation between hard and soft commodities.
Hard commodities are extracted from Earth. For the most part, they are minerals — gold, silver, different kinds of gems, etc. The fuel sources, like coal or oil, are also a part of the hard commodities.
The supply of hard commodities is limited and non-renewable. Due to this fact, they tend to grow in value with time, although it is not a given due to the supply and demand specifics.
Image: Wheat, one of the soft commodities that can be traded on the exchanges.
Soft commodities are produced or grown. The most notable examples are livestock, grain (wheat, rye, etc.) and fruits. Some economists also classify raw electric energy as a soft commodity; however, others deny that it is a commodity at all.
The soft commodities are renewable, and their production volumes can be adjusted if needed. This causes their value to fluctuate instead of having a pre-defined trend.
Contract-Based Commodity Trading
When one imagines a wheat or metal trader, they probably imagine a company with large warehouses and a small fleet of transport. And, to an extent, they are right — there are a lot of companies that redistribute commodities this way. However, most traders never even touch the products they sell. Instead, they trade contracts.
For example, imagine that the market price for a pound of apples is $2 USD. However, a hypothetical farmer doesn’t have apples now — he’ll have them in six months, after the harvest. And during those six months, the price may drop to 1 USD. So, they write a forward contract with the local cidery to sell the apples at 1.50 USD/pound. Now the cidery doesn’t have to worry about supply issues while the farmer knows that he will be able to sell his apples.
Eventually, the forward contracts became standardised in terms of quantity, quality, delivery time and delivery terms. From that point on, a new form of contracts became known as futures contracts. Futures contracts allow their owner to get a commodity at a price specified in the contract.
On the volatile market, futures contracts can also be sold and resold by their owners. And since the futures contracts can be easily traded online, anyone can trade any commodity without a need to leave their home.
The Three Major Commodity Markets
Image: Panoramic view of the Chicago Mercantile Exchange.
There are a lot of mercantile exchanges and commodity markets all over the world. In fact, almost every country has at least one. However, when it comes to global trading, the lion’s share of commodities is traded on only 3 exchanges:
1. Chicago Mercantile Exchange (CME). Established back in 1898, CME was at the spearhead of the modern commodity trading. It is considered the largest futures exchange in the world and it’s one of the few truly universal exchanges. With CME you can easily trade natural gas, wheat, platinum, cattle, and any other commodity you can think of.
2. Intercontinental Exchange (ICE). ICE is a fairly new exchange established only in May 2000. Its founder, Jeffrey C. Sprecher, created ICE as a seamless fuel trading operation, originally designed to supply Sprecher’s power plants. Eighteen years later, ICE actively competes with CME and seems to capture more and more market each year. ICE is known to be focused on hard commodities, although lately attempts to expand into the exotic food markets.
3. Shanghai Futures Exchange (SHFE). SHFE formed in 1999 as an amalgamation of three smaller Shanghai exchanges. Despite being much smaller than the CME or the ICE, SHFE sometimes offers better trading conditions for hard commodities.
Another exchange to follow is the London Metal Exchange (LME). Despite having less liquidity than the other exchanges on the list, it often provides unique trading conditions, unavailable at other exchanges. For example, on January 28, 2019, the price of aluminium on LME was 1 865 USD\tonne while the CME offers were close to 2 350 USD. The situation on other metals was similar, with the smallest difference being 284 USD\tonne on lead.
Trading Commodities vs. Trading CFDs
Image: CFD trading concept.
Futures contracts revolutionized commodity trading, but now they are slowly being pushed out by Contracts for Differences — or CFDs.
A CFD is a contract between the trader and the broker that lists the price of an asset and the date of the payment. Once the contract reaches its deadline, one of the parties will pay the other the difference between the market price and the listed price. For example, if the CFD lists the price of a barrel of oil as 52 USD and the market price is 60 USD, the broker will have to pay 8 USD/barrel.
Unlike the futures, the CFDs are made for trading only. They are also very risky. However, with heavy regulation, CFD trading also provides the investor with some unique trading conditions.
CFD Trading on Commodities - The Inner Workings
CFD trading is characterized by its simplicity. There is no need to get shares, futures or any other security — all you need is a broker. This removes a lot of the legal red tape and allows traders to transact a lot faster.
Starting prices are also different. The futures are commonly negotiated between large companies, with the initial margin being over 5 000 USD. And the full price of the contract often exceeds 100 000 USD — which is impossible for the small-time traders. CFDs, however, can be traded for any amount — even going as low as 100 USD of initial margin.
CFDs also provide additional trading conditions, i.e., leverage. Leverage is an ability to trade with more capital than you currently have, but it goes both ways. On the upside, it can lead to higher results when trading; on the downside, it increases the risks for any trader who trades with leverage.
CFD Global’s Award-Winning Platforms for Trading CFDs
Image: Trader watching the trends on WebTrader platform.
CFD Global is a CySEC regulated broker that allows Forex and CFD trading on commodities, stock, cryptocurrencies, and other assets. It provides its service to customers worldwide, offering a multitude of trading opportunities in a single service. One of the most distinguishing features of CFD Global is the WebTrader trading platform. It is designed from the ground up to provide an enhanced experience to the traders, on desktop and mobile as well, including among others 4 main features:
1. User-Friendly UI. Gone are the menus and spreadsheets of yesteryear. Now everything you need is one click away!
2. Automated Monitoring. Keep an eye on the assets that outperform the expectations.
3. Advanced Capital Management. Adjust all your orders with a simple, yet informative overview. Deposit and withdraw money without any fees. Enjoy complete control over the money you have in your account!
4. Integrated Analytics. Signature accounts gain access to the Trading Central — an advanced analytics aggregator designed to provide relevant data in real-time!
Traders can also use MetaTrader 5 with us if they prefer a local application to a fully online trading platform. MT5 is an accessible and powerful trading terminal, designed with skilled traders in mind, including characteristics such as:
● Large Community. With hundreds of resources available to learn from, you may improve your trading skills any time.
● Customizable Charts. Set up your workplace to look the way you want. Deploy indicators, adjust colours and switch timeframes to create the ultimate trading tool.
● Event Calendar. Never miss the global economic events with a powerful economic calendar that allows you to keep track with the market trends.
CFD Global provides all traders with unique resources to grow and become more and more skilled every day.
CFD Global Trading Conditions on Commodities
CFD Global offers diverse trading conditions on all types of assets. For commodities, which you can trade 24/5, from Sunday at 21:00 GMT (when Asian markets open) until Friday at 21:00 GMT (when U.S. markets close), you will find:
● Variable spreads from 0.03 USD. Employ even the most demanding trading strategies with the minimal spreads.
● Overnight rollovers from -0.0056%. Never settle for a price that doesn’t fit your expectations — with minimal overnight rollovers you can always find the price you seek.
● Leverage up to 1:10. With 1:10 leverage, you can invest a smaller amount and trade more.
Image: Trading Conditions on Commodities at CFD Global.
CFD Global Makes Commodity Trading Simple
CFD Global is more than a usual broker — it’s a gateway into the world of high-end trading. With advanced learning materials and powerful trading tools, CFD Global provides a fast way to learn CFD trading.
Every trader will feel right at home. With advanced leverage options, a dedicated multilingual support team and exclusive real-time analytics, trading has never been easier. CFD Global's platforms run smooth and the team cares about its customers — so everyone's invited to join us!
Sources: Commodity.com, TheBalance.com, Investopedia.com, Energymag.net, Libertex.com and Dummies.com.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71.79% of retail investor accounts lose money, and 28.21% win money when trading CFDs with cfdglobal.com. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.
Therefore, Key Way Investments Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance is not a reliable indicator of future results.