Published on: November 25, 2022

What is a commodity market?

Author: Milos Jakovljevic

What is a commodity market?
Table of 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, primarily bonds or stocks. Thanks to technological innovation in the investment world, retail investors have gained broader access to additional asset classes such as currencies, tokens, crypto-assets, and commodities. 

The beauty of the internet and mobile trading apps means you can trade these assets with your fingertips. Using a high-quality and proven trading app like amana, you can trade all of these in real time with a single application.

Today we will discuss commodity markets, another asset class you can trade on the amana platform. However, before we take a deep dive into the specifics we must stress that you are 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 are doing plenty of market research before executing your trade.

What is a commodity?

A commodity is a tradeable primary good, often raw, extracted from the earth or produced naturally, in contrast to processed manufactured goods. There are soft commodities such as grain, milk or cotton and hard commodities such as gold, silver gas and oil. The commodity market is where producers of commodities meet buyers who then process them up the value chain. The specific feature of commodities is that they are physical and often cover basic human needs, such as raw food or energy. They are also highly homogenous and standardised. In many ways, the commodity market is more natural and has accompanied humankind from very early ages. 

Some commodities are more prominent in the investment world, especially for institutional investors. For instance, gold is seen as a natural hedge against inflation and general instability. In times of high inflationary pressure, investors hedge their investments by purchasing gold and silver. Other commodities, such as oil, or wheat have a more intrinsic value related to demand and supply from producers and processors. This means they are sensitive to events affecting supply and demand. For example, a drought in a major grain-producing area will create a shortage and a spike in prices because demand for this basic food is globally steady. 

What can be traded in a commodity market?

Commodities include goods such as:

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

Who participates in commodity trading?

The commodity market is primarily a natural marketplace for producers and industrial buyers, but middlemen, financial investors and traders are also important players. There are far more individuals involved than in a stock purchase, where you buy at one price and sell at another. Some investors take physical possession of commodities they are buying, others will sell and buy without ever seeing the commodity they trade in. Gold is often kept in vaults at major banks, while grain, oil and gas can be held in storage facilities operated by specialised companies in many countries worldwide. The commodity market is global although it can also have regional or local hubs where physical delivery takes place.  

Thanks to the rise of digital technology, commodity trading has become available to all types of investors, including financial and retail investors who are not interested in taking possession of the physical commodity. Commodity markets and trading are often very speculative, as investors take a position based on their demand and supply expectations. Commodity markets are thus very sensitive to political developments, disruptions, or wars, which can harm supply or physical delivery. 

Commodity speculators often drive the price by investing heavily when the market changes direction, often detaching the price movement from real supply and demand. This can cause commodity prices to shift dramatically. 

Top exchanges in the commodity market

New York is considered by many to be the global financial capital. So, it is 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, making these cities the top North American commodity exchanges. Other prominent commodity exchanges are in London and Amsterdam. 

Much of the trading has moved online, allowing institutional and retail investors alike to gain access to these exchanges from all around the world. 

What affects the commodity market?

The commodity market is largely driven by what is happening to physical demand and supply. This makes it sensitive to all types of news – about production capacity, weather, shipping conditions, political unrest in commodity producing countries or economic problems at commodity importing nations. 

One example would be Russia’s invasion of Ukraine. It caused a sharp spike in wheat and gas prices due to disruptions along the supply chain. Both countries are commodity exporters (oil, gas and grain) and there were concerns about shortages on the global market. Speculators who anticipated a negative scenario, may have purchased either commodity, hoping to make a profit. Prices of oil, gas and grain prices indeed shot up, although later they began to climb back to pre-war levels as supply disruptions proved to be short-lived.  

Commodity derivatives

Derivatives give a trader the ability to speculate on the price of an asset without having to purchase it upfront. It can also help primary buyers and sellers of commodities to lock in on prices ahead of harvest for example. You purchase the right once it hits your chosen price, but you are 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 is not a recommended way of trading for a beginner, however. You must always approach derivatives cautiously, and your capital is always at risk. Forwards can be customized and bought directly. Futures are traded on exchanges like the Mercantile Exchange.

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 at exchanges. Trading software has moved trading towards more efficient online platforms. It has opened the commodity market to millions of traders who would otherwise have limited access to this market. 

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