Types of Commodities traded:
The four common commodities that are traded in the market are:
- Livestock and meat
Ways to trade Commodities:
There are various ways to trade commodities, some of which are:
- The most common way is to purchase and sell contracts in the futures market.
- When commodities are traded in the futures market, traders only deal with price changes. Generally, but not necessarily, there is no physical delivery involved. However, traders who invest in metals sometimes take ownership of gold bars, jewellery, etc. This type of trading is only possible and practical when dealing with metal, but not with livestock and energy.
- An investor can also purchase the stocks of the organization that deals with the commodities. For example, buying stocks of oil drilling companies or the firm that sells seeds, etc.
- Investors can invest in Mutual Funds, Exchange Traded Funds (ETF) and Exchange Traded Notes (ETN) which includes the securities of the companies dealing with commodities. Big portfolios are made using the money of small traders.
- Private funds can also trade in commodities and they are called commodity pools and managed futures. They are similar to mutual funds, but not publicly traded.
Risks in Commodities Trading:
- Commodity price risk is involved while trading commodities in which there is a likelihood of significant change in commodity value which can cause big losses or reduce the profitability significantly.
- The producers / makers of the commodity have a risk if the value of their commodity reduces. The value of the commodities may be affected by weather conditions, technology, political and market situations.
- Like other Futures contracts, commodities also use leverage, where an investor has to make down payment between 5% to 15%. Higher leverage brings higher risk, if the risk is not managed actively or proper strategy is not deployed.