The world of financial markets has made numerous headlines in recent years, and with good reason. These markets underpin the global economy and can directly determine the state of the global economy. One area that is of great importance to many traders is the commodities sector. Let us have a brief look at some of the key features that make commodities markets unique.
It is first necessary to understand that commodities markets focus on physical products and what their prices are expected to be at a certain future date. Thus, one will often hear the term “futures trading” alongside commodities trading. So, in effect, investors will observe various market metrics in order to viably predict where the price of a certain good will be further afield.
Secondly, commodities markets deal in physical goods. This is another fundamental difference when compared to stock markets that deal with the observed value of a share of a company. Although many imagine the commodities markets to mainly deal with precious metals or oil, a great number of other products are monitored on a daily basis. Such examples include can agricultural products (grain, sugar, cotton), livestock and beef, energy, industrial metals, rare earth metals and even rubber.
What is of interest to the commodity trader is that the price of these products often reflects the health of a certain economic sector. For example, if it is perceived that the world may be heading into a recession and therefore industrial output may decrease, the price of crude oil will tend to fall due to what is seen as a lessening future demand. Conversely, if global data hints at a strengthening in the electronics sector, the need to rare earth metals such as rhodium and palladium will increase. Their value, therefore, will also rise.
A final important fact about commodities markets is the way in which the various goods are traded. One can choose to perform what is known as a spot trade which is an immediate transaction of funds for a certain amount of physical goods. This can be frequently seen in precious metals trades where one wishes to take a liquid position when a metal may be on the rise. Another option is what is known as a futures contract. This s essentially an agreement between the buyer and the seller where they both agree on the amount of the trade, the time period when it will be executed in the future and what product is being bought or sold. The two parties can then negotiate the price.
Commodity trading can represent an important hedge against the volatility of the open market, but on still needs to approach this any any other trading platform with both experience and caution.