Commodities Trading 101 - Do You Know the Basics of Commodities Trading?
By Mike Singh
In this article we will look at some generalities concerning commodities. This introduction will include information on the different types and on different ways they are traded on the market. So let's take a closer look first at the different types of commodities there are out there.
First before looking at the different kinds, you should understand that there are many different factors that can affect the prices of commodities. These things include taxes, inflation and money supply. Politics, weather, transportation and its costs and technology and its changes can have an effect as well. Other than this the different kinds of commodities affect it as well.
There are two kinds of commodities we will discuss in this introduction:
1) Soft commodities: The first kind is considered. These are the best kinds of commodities to get your hands on if you can. This is because these include agricultural products, such as sugar, cocoa, coffee, that are in demand all over the globe. These types of commodities are primarily affected by price with a little effect from cultural factors as well. The supply for these types of commodities can be most affected by weather, soil, transportation and even insects.
2) Energies: The next kind of commodity is generally energies, such as crude oil or natural gas. Technological and political things affect the supply of these two. On the other end of this type of commodity, demand keeps rising and has been for a long time. This is because a lot of energy is needed for everything to building to heating and powering homes that are already built.
Besides these basics we will look at two different markets they are exchanged in. These include the spot markets, which is more immediate trading for cash or something else of value. Usually this is confined to personal purchases, for example paying for jewelry with cash, that is what is called a spot trade when it comes to commodities. Although a spot trade can happen on a much larger scale, for example with oil or several million ounces of gold.
The other option is a future trade or option. The commodity itself is not traded, but a promise in the form of a contract is. This states what is to be sold and for how much and by what date. Though this type can be more of a risk, it is done more commonly when it comes to market trading of commodities. The risk comes from predicting most of the variables in the trade and how they will behave.
Hopefully this brief introduction to commodities has given you some basic information. Not only what they are, but also how they can be traded. With this knowledge handy, you are one step further along the line of understanding commodities and trading them.