Commodities are some of the most popular financial instruments, although they differ greatly from stocks, currencies and other asset classes. Review the most important elements of the commodities course to refresh your knowledge of commodities and commodities stocks, futures trading, macroeconomics and commodity trading strategies.
What are the most popular commodities?
There are a vast number of commodities available to trade. Typically, commodities are split into groups:
- Energy commodities
- Agricultural (soft) commodities
- Metal commodities
Energy commodities, such as oil and gas, make up approximately one-third of all commodity trades.
Metal commodities are typically divided into two categories: base and precious metals. The former, such as nickel and copper, are used in global production processes, while the latter, such as gold and silver, are primarily used as stores of wealth.
As the name suggests, agricultural commodities include crops and livestock that are produced for food or fuel.
Futures trading
There are a range of different ways to trade commodities, including as futures. Futures are legally binding contracts used to buy and sell an asset – or an amount of an asset – at a predetermined price on a specific date in the future.
Futures require an initial margin when purchased, although the transaction is only fully settled on the future date, known as the “maturity” or “delivery” date.
Futures help to facilitate trade between suppliers, corporations and governments by providing a degree of certainty regarding pricing and delivery. “Non-deliverable” futures are used by speculative investors trying to take advantage of a commodity’s price movements. The procedure is the same, but without the need to receive a physical delivery of the asset in question.
Commodity Stocks
Stocks are a type of security that represent a share of ownership in a company. Commodity stocks are the same, except that the companies in question are involved in the production, exploration or distribution of commodities.
As the price of a commodity rises or falls, related commodity stocks will often, but not always, move in tandem. As a result, commodity stocks can allow investors to gain exposure to the price movements of commodities, without directly owning the physical assets or investing in the commodity itself.
Macroeconomics and commodities
Macroeconomics involves studying high-level economic and political variables. This is particularly important for those looking to trade commodities, and there are some key macroeconomic factors that can impact the price of the commodities market:
| Supply and demand | The supply of commodities is relatively inelastic, so it can take longer to react to macroeconomic changes. |
| Currency movements | Most commodities are priced in US dollars, and currency fluctuations can influence demand for commodities in non-US markets. |
| Weather | Natural disasters and severe weather conditions can impact the supply and demand of commodities, especially in the agricultural and energy sectors. |
| Technology | Technological upgrades can help to improve production processes or introduce new alternatives to existing commodities, such as renewable energy. |
| Inflation | Many investors choose to buy commodities as a hedge against inflation, although a recession might lead to a demand for goods made from commodities. |
| Geopolitics | Geopolitical factors might impact supply chains, investor sentiment and consumer confidence. |
Commodities strategy
Historically, commodities have demonstrated both short-term price volatility and long-term price trends. As a result, there are a range of strategies available to individuals interested in trading commodities.
- Trend-following strategy: involves trading trends, which are often long-term in nature
- Spread trading strategy: involves simultaneously taking long and short positions on similar assets
- Mean reversion strategy: involves selling short during price spikes or buying the dip during price crashes
Now that you have completed part one of the commodities course, have a go at the commodities quiz or get started on part two of the course, Invest in Commodities!
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EU disclaimer: 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
This communication is intended for information and educational purposes only and should not be considered investment advice or investment recommendation.