You would have heard from your friends and relatives speaking commodity trading. You have even heard of people earning through commodity trading. This might have caught the interest of you and this is the case of many people. These days, many people show interests in commodity and the very purpose of this article is tell the basics of commodity trading, Before getting deep into this subject, it is better to know what is a commodity. Commodities are nothing but the goods that are standard in quality and have demand in the market.
Gold is an ideal example of commodity, as its quality does not vary much whether it is mined in Australia or Africa. As the quality of the gold is standard, it becomes a great commodity. Similarly, the quality of the crude oil does not change and hence you can always ensure that you receive good quality product. Some of the other popularity traded commodities are precious metals like copper, silver and gold; agricultural products like rice, rubber, corn and sugar; energy resources like coal and crude oil.
To tell in simple words, trading a commodity refers to buying a commodity at a price on a day and selling it again some days later. If the selling price is higher than buying the price, then you sell the commodity for profit, otherwise you sell at a loss. Commodities are traded using the derivative tools. Future is one of the examples of derivative tool. In futures contract, a person will buy the right to buy/sell the commodity in a specific date in future. Here, you do not actually buy the commodity but only an agreement to buy in a specific date. The price may fluctuate and go up and down until the selling date. If the price of the commodity has increased from the date of buying the contract, then you trading will result in profit.
Commodities are traded between people between different countries. There are various commodity exchanges across the globe to facilitate commodity trading for the individual traders. Some of the popular commodity exchanges in the world are Australian Securities Exchange, Chicago Mercantile Exchange, and the Tokyo Commodity Exchange. These exchanges are the marketplaces, where traders come to sell or buy the futures contract. The price of commodities goes up and down due to various reasons such as economic, monsoon, weather, wars, political etc.
A good commodity trader should be able to guess the price fall/down and make his move accordingly to increase the chances of earning profits.
Even a layman would have heard of the Stock Market that is associated with investments and stocks of companies. This is common, and the most well know the form of trade investment. Another such thing is the “Commodities Trading”. This term deals with the agricultural products including malt, wheat, corn, and sugar. It also includes metals like gold, and contracts that are based on purchase and trade of the goods. This is opposed to the stock market that deals with the financial instruments like interest rates, government securities, stocks, and indexes. The advent of technology has paved way for both stock and commodities trading that are now available for trade online. Here, we will focus on online commodities trading.
The term online commodities trading have its roots originating from the eighteenth century in Japan. There are some researchers who argue that men traded in the country of Persia in the years before Christ with evidence of primitive trading contracts for different goods. Chicago and New York City are credited for bringing the commodities trading in the U.S.A during the middle of the nineteenth century. The emergence of new technology was ushered with the industrial revolution that includes a number of effective tools that are capable of creating more quantities of food. However, this efficiency demanded more transport, agricultural storage, and re competent movement of the produce.
Initially, the markets could deal with the increasing demand for food, but once the volume rose, the commodity markets with consistent pricing and delivery were progressively more significant. Later, a system was developed to manage the hoarding of goods that take place during the harvest times and with the shortage that occurred prior to the harvest. With the use of the new system, the buyers can arm themselves from the irregularity in price by signing a deal for a specific commodity that is already fixed a specific price before they need it. The contract that is based on the system is not the futures.
Commodity exchanges are the places where the agricultural products and the contacts based on the harmony between the seller and buyer are traded. Before the electronic age, there were some places designated as the commodities exchange. In the online commodities trading, the customers need to have to send, buy or sell the orders from their computers to the electronic marketplace that is provided by the exchange. There is no necessity to have brokers to act on behalf of you and the customers as the approvals to trade are electronically generated. Moreover, online commodity trading is preferred as it is price transparent in most cases. The online committing is trading quite highly reliant on the market conditions that change frequently.