The term commodity refers to a certain good that can be physically traded and that can be interchangeably used with another product of the same type. In online trading, you might have come across such raw materials as gas, oil, precious metals, etc.
In online trading, such assets are used to diversify investment portfolios consisting of traditional securities. We’ll explain why it is important and how it’s achieved by adding some commodities a bit later.
Long ago, to benefit from commodity trading a trader needs a lot of time, money, and experience. However, thanks to online means, you can gain profits without all those professional skills and characteristics. Before you open a trading account to start buying and selling commodities with a forex broker, let’s learn a bit more about this type of financial product.
Classification
Metals
With online brokers, you can trade precious raw materials, including gold, silver, platinum, and copper. Precious metals are considered good investments during periods when financial markets become too volatile for investors to deal with them. Gold, probably, is supposed to be the most reputable and reliable asset in this category since its real value tends to be moving upwards. Nonetheless, you can also learn how to trade silver successfully or find out how to boost earnings from platinum price movements. Just take some time to learn more about this sector.
Energy
Energy materials include crude oil, heating oil, natural gas, and gasoline. Similar to other raw materials, the costs of energy materials are strongly related to the determinants of supply and demand. For instance, if you take a look at historic data, you’ll see that many times a reduction in oil production led to increasing demand and intense buying pressure, which later led to growing oil costs.
This niche is interesting for investors. Nonetheless, here they should be aware of the fact that commodity prices heavily depend on geopolitical events. Oil/gas prices are often shifted because of unstable relationships with main energy product exporters, such as the Organization of the Petroleum Exporting Countries (OPEC) and Russia. The introduction of energy materials alternative to fossil fuels also disrupts this segment.
Agriculture
Agricultural commodities include corn, soybeans, sugar, and other foods. During certain periods, this commodity market is more unstable than the energy sector. Market participants should be following not only big events but also should know different weather conditions can change the output capacity of agricultural commodities in some regions.
Pros
Let’s take a look at the most significant reasons for choosing the market of commodities for trading.
Mitigate the impact of inflation
While causing difficulties for stock/forex traders, inflation can be beneficial for investors in raw materials. Inflation is a period when interest rates spike, making the costs of goods move higher, too. Commodity prices rise. So, basically, when shareholders suffer a decline, commodity investors are happy because they can sell their holdings at higher prices than bought. Because of this, the commodity market is considered the best place to protect one’s capital against inflation. Even if you don’t enjoy profits, commodities are more likely to store the value of your invested funds than other assets.
Find a good haven against disrupting geopolitical events
Geopolitical crises lead to disrupting events in the world of economies. One good example is the causes of the Russian invasion of Ukraine. The biggest weaponized conflict in Europe since WWII led to supply chain disruption and caused a lack of many commodities, including metals, energy resources, and agricultural products. Such conditions can be unprofitable for stockholders because the scarcity of raw materials can lead to decreasing income for companies. However, at the same time, raw materials become more expensive, adding value to your investment portfolio.
Diversify your investments
If commodities become more expensive, companies have to spend more resources to make ready products of them. Usually, this cuts down their earnings, which leads to unprofitable conditions for their stockholders. The earnings per share go down and the stock loses its value.
However, after making your portfolio more diversified, you will be able to mitigate the negative impact of the stock market decline. Diversification is when you allocate a certain share of your investment budget to different assets. Due to the peculiarities described earlier, commodities suit this purpose better than any other financial products.
Increase transparency
Thanks to the introduction of electronic and digital means, you can trade commodities online. This makes products more accessible to a wider number of market participants. Additionally, online commodity trading makes the interaction between buyers and sellers more transparent since the prices quoted in real-time, which excludes any manipulations. Besides, users of online trading platforms can use special tools to adjust price limits that are acceptable to them, either for buying or selling.
Cons
The benefits of trading commodities are quite significant to make you consider these financial products. However, we cannot dispute the fact that there are some obvious disadvantages of trading commodities.
Leverage
On the one hand, leverage can be beneficial for a trader because it provides exposure to bigger positions even if you don’t operate a big capital. However, this also increases the risk of facing bigger losses, which is quite common for commodity traders.
Volatility
The prices of commodities highly unstable when the demand and supply determinants disrupted. As we can see, supply chain disruptions are quite common in the unstable geopolitical situation.
Conclusion
On the whole, online commodity trading has more advantages for a trader. Take your time to find a reliable platform and pave your way in commodity trading successfully.