In this article I explain what a commodity is and what types of commodities there are. I will also tell you how to trade commodities.
Commodities: What counts as commodities?
A commodity is a naturally occurring substance that can either be consumed immediately or processed further. Some commodities are used to produce various goods.
In general, a distinction is made between primary raw materials and secondary raw materials. Primary raw materials are natural resources that are unprocessed. They can either be consumed directly or serve as raw materials for the production of goods. Depending on the raw material, they can, for example, be used in construction or serve as a source of energy. Secondary raw materials are obtained from the reuse (recycling) of primary raw materials.
There are different types of raw materials. The most commonly traded are the following:
Commodities are divided into the following two groups:
Hard commodities: These include metals or energy sources that are mined from the earth or extracted from other natural resources.
Soft commodities: These usually come from agriculture. They are renewable raw materials that are usually only available seasonally and are perishable.
Trading in commodities
For a commodity to be traded on the market, it must be interchangeable with another commodity of the same type and quality. This means, for example: Gold is gold! So it does not matter which company mined it or which gold mine it comes from.
With commodity trading, profits can be made by buying and selling commodities. Commodities in Exness Singapore Asia are traded on the spot or futures market. On the spot market, commodities are traded that are delivered immediately. On the futures market, on the other hand, commodities are traded that will be delivered at a later date.
However, most commodity traders are speculators who do not want delivery of the traded commodities. They merely speculate on future price changes and therefore trade in futures. Futures contracts (forward transactions) are traded on so-called futures exchanges. Futures are transactions that will only be fulfilled in the future, whereas the contracts (forward contracts) are already concluded in the present.
Reasons for commodity trading
There are many good reasons for trading in commodities. The most important are a growing world population, inflation hedging and portfolio diversification. The world population is growing by almost 1% every year. So the world's population will continue to grow in the future. A larger population automatically creates an increased demand for certain commodities. For example, more agricultural raw materials such as wheat, maize or soybeans are needed. But metal or energy raw material prices also rise, since a functioning infrastructure must be created.
With commodity trading, you can also hedge against inflation. Purchased commodities can be sold again at a later date at a higher price. Furthermore, commodities serve to diversify the portfolio. The risk is significantly reduced by diversification into different asset classes. It is very unlikely that all asset classes will lose value at the same time.
Commodities are natural resources that can be directly consumed or further processed. Trading in commodities can be profitable, as the world population and thus the demand for certain resources will continue to grow in the future. In addition, commodities can be used to diversify the portfolio. This reduces the overall risk of the portfolio. The pricing of commodities is influenced by various factors. In general, price fluctuations arise from a change in supply or demand, which in turn can have various influencing factors.