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What is Commodity Trading?
2018 saw the Millennial generation overtake Baby Boomers as America’s largest generation. Naturally, this trend has certain economic, business, and financial implications. As the largest and most studied generation in history, Millennials have been the focus of research especially when it comes to money.
Following the recession of 2008, younger generations (Millennials, Generations X and Z) are facing an increasing amount of financial and economic burdens. Massive student loan debt, historically low wages and lack of security for retirement are just a few of the pressing issues young people today have to face. But while dealing with the increased financial uncertainty in their lives, younger generations are finding new ways to take control of their finances. As true digital nomads, the looked for and found the answer online. Namely, in commodity trading and investing.
Commodity options trading exploded in the past decade. The average daily volume for options trading rose from 11.4 in 2007 to 16.5 million in 2017, according to data from the Options Clearing Corp. That is a staggering 45% increase.
Commodity trading is an exciting and sophisticated type of investment.
While this type of trading has many similarities to stock trading, the biggest difference is the asset that is traded. Commodity trading focuses on purchasing and trading like gold rather than company shares as in stock trading.
Like stocks, commodities are traded on exchanges where investors work as a team to purchase or trade products in the attempt to generate profit from the fluctuation of market prices or because they need the particular product.
Meaning of Commodities
A commodity is a product that comes from the Earth – it has either been grown or produced naturally in the environment. It is usually an unprocessed good that can be processed and resold to potentially make profit.
Types of commodities
The most common examples of commodities include precious metals (gold, silver, platinum), cotton, wheat, cattle, lumber, oil, natural gas, coffee, sugar. There are many commodities to choose from with some assets being more popular than others.
Generally, crude oil, gold, and silver are the most traded commodities. They are included in international and national marketplaces along with a variety of other commodities and in pairs with fiat currencies (USD, EUR). Prices of commodities are driven by a variety of factors. In addition to demand and supply – international trade deals, local policies, economic incentives, new deposit discoveries, and developments all affect market movements.
Until recently, the commodities market was mostly reserved for large companies and institutional investors. However, individual investors have also gained a point of entry via licensed commodity brokers that operate on commodity exchanges, such as the New York Mercantile Exchange, the Chicago Mercantile Exchange (CME Group), the Tokyo Commodity Exchange, the London Metal Exchange, the European Energy Exchange, the Moscow Energy Exchange, and others.
Both companies and individual investors can trade commodities. While individual investors do not need commodities as companies do, they can potentially make a profit from the changes in commodity prices. To make a profit from the commodities market, investors must purchase or trade the commodity at the correct time depending on the movements of the price. There are several methods that investors can use to trade commodities:
- Trade commodities in futures, which represent contracts for the purchase or trade of a commodity at a certain price.
- Trade commodities with options, which represent the purchase or trade of a commodity at a particular date and price.
Commodity trading starts with having a basic understanding of the market and the main forces that drive commodity prices up and down. Depending on whether you re trading commodity futures or options, you need to keep in mind that these are derivatives of the actual market of the physical delivery of the commodity you decide to trade.
Therefore, it is important to learn the fundamentals of the supply and demand for the asset in question. All worldwide commodity exchanges, as well as a variety of trade organizations an government agencies, offer commodity data, news and updates free of changes. However, to stay on top of sudden market movements, traders are advised to add Google alerts and professional subscription services.
Understanding the commodity markets an what determines the future direction of commodity prices rests on a combination of both technical and fundamental analysis. Technical analysis is the study of patterns and price momentum on charts.
Fundamental analysis, on the other hand, involves compiling and interpreting supply and demand data. When it comes to commodity prices, these two sources provide the best insights into the fundamentals of market movement and commodity trading.
HOW DO I START TRADING?
Whether you’re a new or experienced Trader, knowledge is the key to confidence. Needless to say, a successful Trader is an Educated Trader. Invest in your knowledge to increase your profits.
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