Why Trade Commodities

1. Offset risk of ownership Commodity producers will inevitably carry a risk of ownership should prices fall for any reason. To protect the value of their inventory, producers may seek to lock in prices by selling commodity futures for a forward date. This can help offset the risk of price movements which could go against them.

2. Speculation As commodity prices fluctuate, speculators look to profit from these price movements without having to own the commodity outright.

3. Hedging and risk diversification Commodities can often be inversely correlated to equity or fixed-income products. Due to this, holding certain commodities can be an effective way to diversify a portfolio if prices of stocks or bonds drop. Gold is one such commodity which has long been regarded as a safe-haven, particularly so when stock markets crash.

Some considerations when trading commodities

Commodity markets have specific attributes which should be factored in when trading commodities.

1. Leveraged trading Like forex, commodities are traded on leverage. This means that a position can be entered using a small initial percentage of the overall value of the trade. Consequently, just as profits can be magnified, so can losses.

2. Market sentiment In equity trading, fundamental analysis can be used in conjunction with technical analysis to make trading decisions. In commodity trading, supply and demand forecasts are one of the main fundamental metrics to consider. However, market sentiment also plays a major role which can make long-term analysis more challenging.

3. Unpredictability There are many unpredictable factors (such as weather or geopolitical considerations) that can unexpectedly impact on commodity prices. As a result, commodity prices can be subject to excessive volatility in the form of sudden price movements.

Major international commodity exchanges

―     ICE (Intercontinental Exchange): Cotton, coffee, sugar, orange juice, cocoa.

―     CBOT (Chicago Board of Trade): Soybeans, oats, corn, soybean oil, wheat, rough rice.

―     London Metal Exchange: Nickel, zinc, aluminium, copper, tin, lead, cobalt

―     NYMEX (New York Mercantile Exchange): Natural gas, crude oil, heating oil, palladium, gold, silver, copper, platinum.

―     LIFFE (London International Financial Futures and Options Exchange): Wheat, corn, cocoa, coffee, sugar.

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