What is commodity trading?

Commodities trading involves buying commodities with the intent of selling them later. Traders profit from the price fluctuations of selected assets.

There are several ways to invest in commodities. You can choose the one that best fits your needs.

When choosing an investment method, don’t rush. Consider everything: your investment goals, risk tolerance - yes, commodities are considered high-risk assets due to price volatility - and your level of preparation.

This is simple: direct buying and selling of the actual goods. For example, a barrel of oil or a ton of wheat. However, this option is not suitable for everyone. It is mostly used by large corporations or product manufacturers.

Futures, or futures contracts, are agreements to buy or sell a certain amount of a commodity in the future, with the price agreed upon in advance. This allows retail investors to speculate on price changes without owning the physical asset.

Options on futures should be noted separately. These are similar concepts but have differences. Unlike a futures contract, an option gives the trader the right to buy or sell a futures contract - if it’s profitable for them. But unlike commodity futures brokers, it does not impose an obligation.

Don’t want to buy commodities directly or deal with futures? Turn to investment funds that literally do everything for you. Here’s the point. You purchase shares that reflect the value of certain commodities. Oil, gold, agricultural products – it doesn’t matter. At the same time, the commodity ETF (this very investment fund) already has in its portfolio assets related to the needed commodity. All that’s left for you is to earn from price changes without the need to buy and store the commodity.

Despite broad opportunities for traders, investments in commodities also have some disadvantages. We recommend getting familiar with them. That way, you’ll be able to weigh all the pros and cons of this type of trading.

In fact, the last point brings us to the topic we also want to touch upon in the context of how trading commodities works.

Let’s start with the fact that Forex and commodities are different markets. Although they have several points of intersection.

First, many commodities (gold, oil, agricultural products, etc.) are priced on the international market in US dollars. Accordingly, exchange rate fluctuations significantly affect the value of these goods.

Second, the currencies of some countries are closely tied to the price of specific commodities. As a rule, these are the goods they export. For example, Canadian dollar is closely linked to the price of oil.

And finally, the third reason why traders often talk about forex commodity trading. It’s risk hedging. Yes, traders often use one of the markets to hedge risks on the other. Another tactic is also widely used: traders move between the two markets to take advantage of price movements in both of them.