Commodity trading is the buying, selling, or trading of raw materials or primary products, such as oil, gold, coffee, wheat, and metals. Commodities are typically sorted into four broad categories: metal, energy, livestock and meat, and agricultural. Commodities can be traded physically or through derivatives trading using spot prices, forwards, futures, and options on futures. Futures contracts are the oldest way of investing in commodities. Commodities trading is an ancient profession with a longer history than the trading of stocks and bonds.
Commodity markets can include physical trading and derivatives trading. A commodities exchange is a physical location where the trading of commodities takes place, and legal entities have been formed to enforce the rules for the trading of standardized commodity contracts and related investment products. The most common way to trade commodities is to buy and sell contracts on a futures exchange.
Investors in the commodity market aim to profit from supply and demand trends or reduce risk through diversification by adding different asset classes to their portfolios. Commodities trading can be an effective means of hedging a portfolio against a bear market or inflation. However, commodity trading is a high-risk, high-reward endeavor, and traders should have a high tolerance for risk if they choose this path.
Some reasons to trade commodities include:
- You want to trade rising and falling markets – going long and short
- You want to leverage your exposure
- You want to take shorter-term positions
- You want to hedge your portfolio
- You want to trade without owning the underlying asset
In summary, commodity trading is the buying, selling, or trading of raw materials or primary products, and it can be done physically or through derivatives trading. Commodities can be sorted into four broad categories, and investors aim to profit from supply and demand trends or reduce risk through diversification. Trading commodities can be an effective means of hedging a portfolio against a bear market or inflation, but it is a high-risk, high-reward endeavor.
