Commodity Trading

The bull run in oil and precious metals prices has sparked a new interest in commodity trading. Commodities are highly leveraged, speculative investments that are generally volatile in nature. Because commodities are generally consumed or utilized in manufacturing processes, trading commodities is a very fundamental process.

Why Commodities are Different

With stock, there is always a set number of shares trading on any given day. When it comes to commodities, the changing supply and demand makes them an everyday adventure. Although it is certain that the number of WalMart shares will be the same tomorrow as it there are today (absent stock splits), the number of oil contracts or the amount of oil consumed will change by the hour. In many respects, commodity trading requires a more attentive investor.

A Highly Leveraged Game

Commodities are very highly leveraged investments in two completely different ways. First, the change in supply and demand of a commodity automatically entitles it to a volatile status. Plus, many brokers allow traders up to 40:1 leverage to buy and sell commodities on the open exchange. Most commodities are traded in huge lots that would require a large amount of capital just to buy one lot; with leverage, even the smallest investor can get in on the action.

Commodities in the World Market

The commodities market is virtually a 24/7 market. Though there are many different markets that trade throughout the day and open and close at different times, commodities in the US are the same as commodities in Europe and Asia. The price of gold in Asian commodity trading will be reflected in the price when the US markets open. Many traders who enjoy the foreign exchange market, but would prefer to trade more fundamentally driven investments, will find the commodities market a nice change from the currency markets. There are some drawbacks to a 24/7 market, as the price of your positions will change as you sleep; thus, short term investors in the commodities market are likely to buy and sell within the day rather than hold an investment through another trading cycle in a foreign country.

Commodities are Nothing like Stocks

While stock traders should be able to adapt stock trading techniques to the commodities market, there are some fundamental elements of commodities trading that do not reflect themselves in the stock markets. Rain patterns, changing exchange rates, and geopolitical tensions all affect commodities with much greater force than they do stocks. A drought in the US will bring higher corn prices, while heightened political standoffs always bring higher metal prices.

Commodity Brokers

Commodity trading has grown tremendously to the point where individual investors now have access to the market. Prior to the boom in commodities, most traders were institutional. Today, investors have the ability to trade commodities via their brokers, either through the proxy of ETFs or directly on commodities exchange, such as the CBOT. Direct access to commodities market favors the small investor who no longer has to pay high fees or expense ratios to enjoy the ups and downs of each commodity.