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Commodity Trading Basics for a New Company
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You might find yourself asking what a commodity is. Not all products are considered commodities; in fact, a painting is not a commodity, why? each painting is unique. To be considered as a commodity, items or products must be uniform and one portion/individual will serve the same purpose as another.
However, you can observe some differences. Differences in composition and shipping costs give rise to different prices and markets. Commodities are traded in either a spot market or a future market.
In a spot market, commodities are immediately traded in exchange for some goods or cash. A typical example is when you buy jewelry. You give the money and in return, the seller gives you the jewelry.
In a future market, the good itself is not traded. A contract is formed, and the commodity will be bought/sold at a certain future date, at a certain price.
Commodity trading has been taking place for centuries now. In the 18th century, modern markets arose. Commodity trading is usually done in future form or options. You’ll expect a much bigger scenario of gains/profits as well as losses. It would involve future predictions, risks, and uncertainties.
Not a single person would know the exact and certain future price, which is why it is called speculation. Complicated analysis of the current conditions like political events, weather predictions, and other variables is badly needed.
Commodity trading is also complicated. Prices certainly vary, this is due to the different costs of production, shipping costs, refining costs, and many others including expected demand.
A future contract in commodity trading does not only carry the right to buy/sell a product or item at a specific date and at a specific price, but also the obligation to fulfill such contract.
Commodity trading also has its abc’s, and this includes:
- expectancy
- funds
- fundamental analysis
- hedging
- leverage
- margins
- order types
- reading prices
Expectancy affects the supply and demand. And there are certain factors that do affect supply and demand; this would include economic factors such as weather predictions, crop yields and many more.
Fundamental analysis studies the different factors that affect supply and demand. A high supply with low demand will result to low prices; when the demand is high but the supply is low, prices will naturally rise. Complexity abounds in this world, and these principles should likely guide traders.
Investors also differ with one another. One might be bold, some are cautious… but most investors with funds is somewhere between the two.
Hedging and speculation are two motives that compel commodity traders. Speculation is more profit-oriented while hedging is focused more on protecting profits and minimizing possible losses and is considered a defensive strategy.
Leverage got its name from commodities being traded in future contract form.
Margins are also another concern when it comes to commodity trading. Inflation is substantially rising and is likely to continue for the succeeding years.
There are no guarantees when you’re talking about commodity trading, no matter how much you speculate. Either you can make money or loose it… risks of losses can be minimized by certain methods which professional traders make use.
Price quotes are a basic information item. Consumers are naturally concerned with the prices of commodities.
Any company desiring to engage in commodity trading should get access to all available resources that can help them in staying on business regardless of the many risk factors that abound the market.
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