New To Commodities Trading? Start Here!
Commodities Trading 101
Today we’re going back to the basics. Due a deluge of new readers here at Commodity Trading Research, I feel the need to take a step back and cover some basic commodity trading essentials.
So many investors don’t understand what commodities are, much less how to profit from them.
Let’s get right to it…
What Are Commodities?
The biggest difference between commodities and other asset classes is that they’re real. You can reach out and touch them. Maybe they’re grown on farms (like corn and soybeans) or they’re dug out of the ground (like gold, copper, and crude oil).
The most commonly recognized commodities are oil, corn, and wheat. If you live in a first world country, you likely use these commodities on a daily basis.
Other commodities include gold, silver, and natural gas. You may not realize it, but you’re likely using these assets on a daily basis as well. Whether you’re simply using a computer or simply heating your home, these commodities are playing a role.
Of course, there are plenty of other commodities affecting our world every day. Without them, our modern life simply wouldn’t be the same!
How Commodities Markets Work
Just like stocks and bonds, most commodities are traded on an exchange. The exchanges are either a physical location or a virtual meeting place where buyers and sellers meet.
There are a number of exchanges around the world. Here are a few of the most prominent ones:
- Chicago Mercantile Exchange (CME)
- Chicago Board of Trade (CBOT)
- New York Mercantile Exchange (NYMEX)
- Intercontinental Exchange (ICE- All Electronic Trading)
- Shanghai Futures Exchange
- Tokyo Commodity Exchange
- Deutsche Borse/Eurex
- London Metal Exchange
Trillions of dollars worth of commodity contracts are traded worldwide on a daily basis. Without question, the global commodity markets are enormous.
Now that we know what commodities are and where they’re traded, let’s discover who’s actually trading them…
There are three types of market participants: producers, end users, and speculators.
Producers are the ones bringing the commodities to the market. It may be a small Iowa farmer with corn to sell, or a big oil producer hedging future production.
The end user is the other end of the spectrum. These are the people or companies using a commodity. An example is General Mills (GIS), one of the world’s largest food manufacturers. This company takes raw food commodities and turns them into hundreds of edible products for consumers like you and me.
And now for the speculators…
These are the market participants that aren’t involved in producing or consuming a commodity. Rather, they’re merely betting on price fluctuations in various commodity markets.
Why do such a thing?
To make money of course.
While the role of speculator may appear unnecessary, they play an important role in the commodity markets. First of all, they provide much needed liquidity. Without speculators, commodity markets would become more volatile than they already are.
Secondly, speculators provide a very important service: price discovery.
Let’s face it, nobody wants to lose money in the markets. That’s why speculators pour enormous amounts of time and energy into collecting information. They use their information to obtain an opinion about where the price of a specific commodity should be.
The collective thoughts and actions of producers, end users, and speculators make commodities trading what it is.
Commodities Trading 101: This Is Just The Beginning!
What we covered today are some of the basics of commodities trading. We discussed what commodities are, where they’re traded, and who trades them.
Of course, there’s much more to commodities trading than that!
In future Commodity Trading Research articles, we’ll be discussing additional commodity concepts, including:
- The purpose of commodity markets
- Futures Contracts
- Supply/Demand
- Contango
- Backwardation
- The effect of currency movements of commodities
If you’re new to commodities trading, you’ve found the right place!
Until Next Time,
Justin Bennett
Commodity Trading Research
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at http://commoditytradingresearch.com/free-sign-up.
Category: Commodities
