What is a commodity market?

What is a commodity market?
Table Content
What is a commodity market?
What can be traded in a commodity market?
Who participates in commodity trading?
Top exchanges in commodity market
What affects the commodity market?
Commodity derivatives
Commodities as investment and speculation
How to trade commodities?

There are several asset classes that you can invest in. Traditionally, retail investors would stick to one type of asset class when the approach to investing was more rigid. As technology leads to more innovations in the investment world, you can now invest in multiple asset classes. This includes stock markets, foreign currency, and other markets, including cryptocurrencies like Ethereum.

The beauty of the internet and mobile trading apps means you can trade these assets at your fingertips. Using a high-quality and proven trading app like amana, you can trade all of these different assets and have them under one application.

Today we’ll look at commodity markets, another asset you can trade on the amana platform. However, before we take a deep dive into the specifics of this market, we must stress that you’re not guaranteed to make money from any investments and that your capital is always at risk. Approach every trade cautiously, only invest money you can afford to lose and ensure you’re doing plenty of market research before executing your trade.

What is a commodity market?

A commodity market is a tradeable good extracted from the earth or produced naturally. Stocks are an investment in a company and can be traded on an index. Commodities have a line of production, which involves a producer, a buyer and a seller. The commodity market is one of the most interesting asset classes as it derives its worth from the real value of goods. In addition to this, it operates more like a natural market than, say, forex or stocks or cryptocurrency, for instance.

Some of these markets are more visible when it comes to institutional investors. For instance, gold is seen as a natural inflation hedge. In times of high inflationary pressure, investors will hedge their investments by purchasing gold and silver. Other commodities, such as oil, are often traded off the back of news that can cause spikes in investment activity. However, we will look at more examples in the next section.

What can be traded in a commodity market?

Commodities include items such as:

  • Gold
  • Silver
  • Wheat
  • Water
  • Oil
  • Sugar
  • Coffee

Who participates in commodity trading?

Thanks to the rise of digital technology, commodity trading is something that any retail trader can get involved in. However, a beginner must be fully aware of the risks and always perform due diligence before getting involved in this investment area. 

The commodity market is often a natural marketplace, so there are several links in the chain. Whether it is the producer of the good, the distributor, the seller or the purchaser. There are far more individuals involved than in a stock purchase, where you buy at one price and sell at another. 

However, if we zoom out on those directly involved in the trade, we also have indirect benefactors such as speculators. Commodity speculators often drive the price by investing heavily in the price moving in a specific direction. Depending on the level of investment, this can cause the price to shift quite dramatically. 

Top exchanges in commodity market

New York is considered by many to be the global financial capital. So it’s no surprise that one of the main commodity trading centres in the United States is based there. The Mercantile Exchange operates out of New York and Chicago and are the top North American commodity exchanges. They aren’t exchanges with a trading floor like the New York Stock Exchange; this is simply the name applied to the electronic exchange. 

Many large investment companies are moving their operations online as the world moves toward a digital-first approach. This has also benefited retail traders, who are everyday traders like you and me. Thanks to these advances, this technology can help us execute trades via high-quality mobile trading apps such as amana.

What affects the commodity market?

As discussed earlier in this article, the commodity market is driven by several factors. Whether it is stories in the media or speculation, the price can be subject to quite substantial and volatile changes when these two factors are in play. 

One example would be Russia’s invasion of Ukraine. This caused a sharp spike in wheat and gas prices due to disruptions along the supply chain. Speculators who anticipated this would take place may have purchased either commodity, knowing the effect these events would have on the price. Situations like this have a critical impact on the price of commodities.

Commodity derivatives

Derivatives give a trader the ability to speculate on the price of a stock without having to purchase it upfront. Derivatives work in a similar way to options. You purchase the right once it hits your chosen price, but you're not compelled to buy the commodity. They are separated into two categories:

  • Futures
  • Forwards

By agreeing on a predetermined price, trading in this way can give an investor more flexibility. This isn’t a recommended way of trading for a beginner, however. You must always approach cautiously, and your capital is always at risk. The major distinction when it comes to these two categories is simple. Forwards can be customized and bought directly. Futures are traded on exchanges like the Mercantile Exchange and are less flexible.

Commodities as investment and speculation

There’s much debate regarding commodities as an investment. If you're looking to invest in gold, this is usually viewed as a hedge against inflation. Speculation, for example, drives the market, and it is something that day traders will try to analyze in an attempt to make a profit.

How to trade commodities?

Trading commodities has never been easier. By using a high-quality mobile trading app like amana, you can trade commodities from the comfort of your own home. In the past, commodity trading was executed via brokers. However, trading software has hit the ground running as the world has begun to move towards more efficient online platforms. It has opened the world to millions of traders who would otherwise have had issues accessing the market.

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