Commodity Trading

Commodity trading dates back centuries, to an era long before the development of the financial markets. It involves the exchange of different assets based on the price of a physical commodity – typically metals and energy. The commodity market is one of high risk and high reward, where a more specialised level of knowledge is required.

Most commodity traders operate via a futures exchange, which is where an agreement is reached to buy or sell an asset at a predetermined price at a certain time in the future. When that futures contract expires, the buyer is obligated to pay the commodity price that was agreed.

If, in the intervening period, the value of the asset has risen above the agreed price, the buyer stands to make a profit. Conversely, if the market price has fallen below that benchmark, they will suffer a loss.

An alternative is for traders to purchase stocks in businesses that are associated with these commodities – such as mining companies or oil refineries. Adopting this approach means commodity traders are not just taking a risk on the value of that particular product, but on the performance of the company itself.

Of course, commodity prices are likely to impact an organisation’s share price, but it’s not the only contributing factor as businesses can still make a profit even if the commodity itself suffers a drop in value.

As with all types of trading, there are no guarantees when it comes to commodities. It’s important that traders understand and appreciate both sides of the coin before they enter the commodity market. They should ensure they’ve done the necessary research and analysis prior to taking up any positions.

The commodity market is particularly high risk and high reward, perhaps even more so than most other markets. Commodity traders can take steps to mitigate those risks, but it’s a market that requires a good deal of specialised knowledge in order to be navigated successfully.