Anyone who wants to participate in the commodity trade markets should keep in mind that there are a lot of unique aspects to this kind of buying and selling. Compared to more traditional methods, like the stock markets, commodities trading offers many advantages but also comes with a few unique risks of its own. What should people know and what should they look out for?
Advantages of Commodity Trading
The good news for anyone who is curious about getting involved in commodities is that the market offers unique advantages. Here are a few of them:
- Potential profits are high: Compared to the corporate stocks, bonds, and other more traditional investments, commodities feature a significant amount of price volatility on a short-term basis. There are dozens of reasons for this kind of behaviour, but for anyone who owns a stake in precious metals, petroleum, cattle, corn, soybeans, or copper, there’s a chance to make rather large profits or losses on these major changes in value.
- You Can Limit Your Losses: Of course, it’s not unique to be able to limit losses but traders do have the chance, whether using futures, CFDs, ETFs, or other methods, to set stop-limit and stop-loss orders. The former automatically takes you out of a position when profits reach a determined level. The latter do the same on the loss side of the ledger.
- You get protection from inflation: When inflation is out of control, or just slowly creeping up, the value of real goods and products tends to rise as well. That means that owners of stock shares might suffer while those who hold futures contracts or CFDs in things like petroleum, precious metals, wheat, nickel, or silver might be doing quite well.
- Margins are low: Participants have the chance to trade without putting up more than 20 percent, in some cases, of the value of the underlying asset. With standard shares orders, it’s common for margin levels to be around 50 percent or more.
- There are lots of ways to take part: To take part in the hard asset exchanges, participants have a wide variety of choices, including futures contracts, CFDs (contracts for difference), ETFs (exchange-traded funds), and other vehicles. Depending on your preferences, you can find a technique that suits your own style of buying and selling.
- Pricing is transparent: Because commodity participants number in the millions at any given time, there’s never a problem with liquidity or value transparency. So many people are transacting deals that costs are representative of what the underlying assets are truly worth.
- It’s a good way to diversify: Diversification is a smart goal for anyone who wants to limit exposure to risk. Adding something other than corporate stock shares to a portfolio makes sense whether the economy is strong or weak.
The Special Case of Gold
Gold has always been a special case because it’s one of the oldest investment vehicles on earth. Thousands of years ago people hoarded it, traded it, make valuable jewellery and costumes out of it, and gave it as gifts to kings and queens. Indeed, from the beginning of recorded history, the yellow metal has intrigued and mystified virtually everyone who comes in contact with it. Nowadays, the price of this kind of precious metals is soaring. Partly in response to the recent global COVID pandemic and economic uncertainty around the world, the per-ounce price of gold has been reaching new heights.
For traders, these volatile swings in the value of the metal are good news because it’s entirely possible to earn profits on commodities trades in rising and falling markets. But gold is a special case because its price swings can sometimes be predicted with at least a bit of clarity. Perhaps that’s why some market enthusiasts chose to specialize in the shiny stuff and make a hobby or living out of buying and selling it.
Unique Opportunities in Oil
Like gold, petroleum is another favourite vehicle for commodities traders all over the world. The past five years offers a good example of why this is so. In late 2015, the per-dollar cost of a barrel of oil was about $43, the same as it is today. But during that half-decade, there have been wars, political unrest, huge economic changes in Europe, new leadership in the U.S., a worldwide viral pandemic that virtually shut down the entire global economy, and more. What happened to petroleum’s cost in the interim? It shot up to new heights and plumbed new lows, all of which gave speculators a chance to make huge profits on the swings from month to month.