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Transcript
Many traders turn to commodities to diversify their portfolios or to potentially make large gains that come from higher volatility.
This can also mean a higher risk of losses over a short period of time.
Let’s take a dive into the world of commodities.
Commodities are like the building blocks of the world.
When traders talk about commodities, they’re usually referring to all the raw materials that produce the things we all use, like the petrol you fill your car with, the sugar you put in your cakes, and even the various metals that make up your phone.
There are tons of different commodities that can be invested in:
Oil, Gas, Heating Oil, Gasoline, Gold, Silver, Copper, Platinum, Corn, Wheat, Soybeans, Coffee, Sugar, Live Cattle, Cotton and Cocoa.
That was a lot of commodities — and it’s not even all of them!
Commodities are well known for the volatility in their price movement, which is impacted by their supply and demand.
Some of the factors that may influence this supply and demand include things such as production costs, political and economic conditions, natural disasters, currency exchange rates and market speculations.
So, in order to trade commodities — it’s important to stay updated regularly on the news and events of these markets.
Let’s look at a relevant example:
At the end of 2022, China, the world’s second-largest economy, removed its Covid restrictions. Investors believed this change would lead to an increase in its inbound and outbound flights, increasing demand for oil.
That is why many traders chose to buy oil at that time, in order to benefit from that turn of events.
Commodity trading has the potential to assist traders in multiple ways. In addition to diversifying their portfolios, it can sometimes offer a hedge against negative portfolio movements.
For example, while some stocks perform badly as inflation rises, due to their intrinsic value, commodities may perform better.
Gold is one commodity in particular that is widely considered a hedge against inflation.
Gold is a tangible asset with a long history of holding its value. Since its demand is hard while supply is limited, and since it doesn’t rely on government stability or the performance of a specific industry, this can make it a relatively stable investment compared to other assets.
It’s as good as gold!
Now if you don’t want exposure to the commodity itself — that’s ok!
You can trade commodities indirectly too by investing in stocks that are correlated to the commodity in question.
For example, you can invest in energy stocks that may be affected by the oil commodity, such as Chevron or Exxon-Mobil.
Traders may also choose to apply leverage when trading commodities.
This can create a great impact on their volatility, which is multiplied when leverage is applied.
This also means a greater risk, which is something traders need to understand.
Commodity trading is a volatile world due to a plethora of factors that can influence its many market conditions. The key to trading commodities is keeping a finger on the pulse and staying up to date with news and events.
The eToro feed can be a great place to do this as financial news and the sentiment of other investors are shared there for all to see.
So good luck, and hope to see you there!