Are you looking for a complete and comprehensive definition of commodities?
Maybe you’re even thinking about starting to trade with them but don’t know where to start?
Well! Then I suggest you read this complete but simple post! You will find in it everything you need to become a “wizard” of commodities!
Let’s start!
#1 Commodities definition: What are commodities?
Commodities are raw materials, that is primary goods, also used to produce final goods or goods for consumption.
Commodities include:
• energy products, such as oil and petroleum;
• metals, such as gold, silver and copper.
• agricultural products, such as wheat soy, cattles.
Then there are soft commodities such as sugar, cotton, cocoa and coffee.
#2 Commodities definition in detail:
Commodities as an asset class represent a really heterogeneous class of assets, with various usages, diverse uniqueness and qualities, diverse storage capacity and varied intensity of renewability.
They can be categorized into two macro-categories: Soft Commodity and Hard Commodity.
The commodities stemming from the agricultural and breeding sector come from the Soft category, which can be separated into:
• agricultural goods: oats, soy flour, wheat, corn, soybean oil, soy, cocoa, coffee, cotton, timber, orange juice, tobacco, sugar.
• meat: cattle, dairy cattle, pigs, pork belly.
The commodities of the energy sector, precious metals and industrial ones belong to the Hard category.
They then be can be separated into:
• precious metals: gold, platinum, silver, palladium;
• metals: aluminum, cobalt, nickel, copper, zinc, molybdenum, steel, tin;
• energy: petrol, ethanol, natural gas, naphtha, petroleum, propane;
• electric energy.
Where are Commodities negotiated?
North America:
The New York Mercantile Exchange (NYMEX) where, gold, naphtha, natural gas, WTI Crude Oil, gasoline, propane, platinum, silver, palladium, are traded.
COMEX, is the square where industrial and precious metals are traded;
The Chicago Mercantile Exchange (CME) where a wide range of products are traded: currencies, interest rates and commodities, futures (and options) on indices, up to derivatives on economic indicators (eg inflation) and on the weather conditions trend;
Chicago Board of Trade (CBOT), founded in 1848, where corn, oats, rice, soy, soy flour, wheat, ethanol are traded. Since 2007 CBOT is part of the CME group;
Toronto Stock Exchange (TSX) is the main stock exchange in Canada, where mining and energy stocks are traded.
Asia:
Dalian Commodity Exchange (DCE): is considered the second stock exchange in the world for the exchange of futures in the agricultural sector;
Multi Commodity Exchange (MCX): private exchange based in Mumbai, India. Oil, natural gas, seeds / grains and industrial / precious metals are traded.
Europe:
The Intercontinental Exchange (ICE) where sugar, coffee, cotton, cocoa, concentrated orange juice, raw Brent, raw WTI, electricity are traded;
The London Metal Exchange (LME) where copper, zinc, lead, tin, nickel, aluminum, cobalt, molybdenum and recycled steel are traded;
The European Energy Exchange (EEX), part of the Eurex group, controlled by Deutsche Boerse: it is a regulated commodity exchange that owns and manages various markets for the exchange of electricity in Europe, Asia and the United States;
Euronext.liffe, stock exchange established in 2000 following the merger of the stock exchanges of Amsterdam, Paris and Brussels, where the futures and options of Euronext are traded.
The pros of investing in commodities
1. diversification is king
I really want to focus on the importance of portfolio diversification.
In fact, in a diversified portfolio, the assets do not always move in the same direction (up or down), which allows you to reduce the overall portfolio risk.
The principle of diversification is thoroughly connected to that of correlation, or to the measure of how much two or more investments move in consonance.
Let’s take gold.
It represents one of the few financial assets that presents reduced correlation measures matched to other financial instruments, each with positive and negative markets and even reveals a diminishment in correlation when the markets are under tension.
And here we come to the second advantage offered by commodities.
2. your protection from inflation
When it comes to cost inflation, for instance inflation of goods and services produced by an escalation in the price of primal matters, the investment in commodities can protect the portfolios vs the rise in prices.
3. a great protection from event risk
Raw materials can provide protection versus “event risk”, that is the risk that a financial crisis, a conflict or other geopolitical incidents can trigger loss in other financial assets.
Gold provides safety to its savings when faced with severe risks
The cons of investing in commodities
1 Specific knowledge
Specific commodity market areas (like the agricultural or livestock field) necessitate particular understanding related for instance to the seasonality or product process.
2 Volatility
In the past, raw materials have presented a volatility nearly comparable to the stock market.
3 No coupons or dividends
When it comes to commodities and currencies, the investor does not obtain coupons like for bonds or dividends (stocks).
CFDs commodities trading
A very popular form of investment in commodities is CFDs trading.
The CFDs are the fastest and most lucrative way to make money with commodities.
CLICKING HERE you can find my complete guide on how to trade with commodities and which broker to choose.
CFDs are negotiable online financial instruments that allow you to earn from price changes in a financial asset such as gold, silver, currencies, stocks and so on.
This way you will never own the commodity but you will earn if your forecast is correct.
You can open a long position (buy) if you expect the gold price (for example) to go up or open a short position in case you expect the price to fall.
In the first hypothesis if the price of gold will increase you will earn, vice versa if the price will fall your position will be at a loss and vice versa.
It is essential to choose an authorized broke, and master the use of stop losses.
I strongly recommend that you practice in demo mode before investing your money.
For more information on trading with commodities click here!
Future contracts
Futures contracts are particular types of contract where the two parties agree to execute a transaction on a financial instrument or raw material, for future exchange at a set price.
If the price goes up, the buyer instead earns the seller profit if the price goes down.
Options on futures
Through the option (contract) you get the right to buy, option “Call”, or sell, option “Put”, a certain amount of underlying asset, at a strike price, or a fixed price, and this by a certain date / deadline, American option, or when it is reached, European option.
The option buyer exercises the right to buy, call, or sell, put, and what he will get (the revenue) will vary based on the choice made.
In the case of a call option, the revenue will be the result of the difference between the spot price, ie the current price of the underlying, and the exercise price.
In the case of put, the revenue obtained will be the difference between the exercise price and the spot price.
ETFs
By ETF we mean exactly the Exchange Traded Fund and incorporates derivative instruments that can be based on stocks, bonds, commodities and many other indices.
Unlike binary options and CFDs, ETFs are regularly listed on the stock exchange just as they are for shares and have the similarity to CFDs of faithfully replicating the reference index.
Although the ETF market is similar to that of equities due to the fact that they are tradable instruments in real time, with total flexibility and transparency in information, the risk of bankruptcy is lower thanks to the diversification that characterizes the funds.
A feature of fundamental importance for the ETFs, is in fact that of enclosing within itself an entire index, namely the benchmark.
Stocks
Most of the companies that work with raw materials are publicly traded, such as oil companies, mining companies and so on.
Nevertheless, even for the stock market, you need to have a good knowledge before investing your money.
You can learn a lot from Warren Buffet, a famous stock investor who has accumulated wealth for several thousand dollars.
Conclusion
In conclusion we can say that commodities are an attractive form of investment, whether you want to invest in “long term” or want to try your hand at trading.
My advice is to deepen your knowledge of this expanding market to reap the maximum benefits and adequately protect your portfolio.
Leave a comment below if you want to share your thoughts or your experience.
*comments are very welcome.
If you have specific requests, do not hesitate to contact me at acetrader@forex-expert.net . I will personally replay asap!