Guide to Commodity Trading for Beginners

While there are numerous markets available for traders and investors, the commodity market is considered one of the oldest ones still in existence.

Commodities play a pivotal role, not just within the realms of finance, but in our day-to-day existence, forming the backbone of essential goods we rely on.

So, what precisely are commodities, what is commodity trading, and how to start trading commodities as a beginner?

This commodity trading beginner’s guide article answers the questions above as it presents the trading basics when it comes to the commodity market.

What Are Commodities?

In short, commodities refer to goods that act as interchangeable products and primarily serve as inputs in the manufacturing of other goods or services.

What Are the Different Kinds of Commodities?

Commodities encompass a diverse range of markets, but these can be segmented into two main categories; hard commodities and soft commodities:

Hard Commodities

Hard commodities refer to natural resources such as metals like gold (XAU) or energy such as Oil (CL). As such, hard commodities can either be mined or extracted from the earth.

Soft Commodities

Soft commodities refer to agricultural materials that are grown, and these can include livestock such as cattle (LE) and products like coffee (KC) or wheat (ZW).

Types of Commodity Markets

Within both the hard and soft segments of commodity markets, it is essential to acquaint yourself with various types of commodities before engaging in trading activities. Understanding these specific markets is crucial to meeting your trading requirements effectively, given their distinct specifications. Some of the main commodity markets are as follows:

Energy

Energy markets encompass commodities that can be used to generate energy such as crude oil, brent oil (EB), and gasoline (RB). You can learn more about energy markets in our “Energy Commodities Trading” article.

Metals

Metals can refer to materials used in jewelry making such as silver (XAG) and gold or other materials that can be used in the production of electrical products such as copper (HG).

Agriculture

Agricultural markets include food sources or materials used in the making of certain food products. This can range from coffee to corn (ZC) and soybeans (ZS) to livestock.

How Commodity Trading Works

Trading commodities involves the buying and selling of commodities (as underlying products).
This can be done through trading commodity CFDs, commodity futures, or trading commodity stocks.

Futures are derivative contracts that involve buying and selling contracts on a futures exchange and allow you to speculate on whether the price of the underlying commodity will rise or fall. Another way to do it is through trading commodity Contracts for Difference (CFDs) which are financial derivatives that allow to trade on rising or falling commodity prices without having to own the underlying asset. You can learn more about commodity CFD trading in our “How to Trade Commodities with Plus500” video.

Another way to trade commodities can be through trading CFDs on commodity stocks such as Rio Tinto Group (RIO-L) which produces metals like aluminum, iron, and copper, and Albemarle (ALB) which manufactures lithium among other commodities.

Pros and Cons of Commodity Trading

Before deciding whether to trade commodities or not, it is important to look into the pros and cons of commodity trading in order to see if this is the right choice for you.

Advantages of Commodity Trading

High Liquidity

Commodities are generally considered to be highly liquid as they can be sold at almost any given time and liquidated.

Portfolio Diversification

Due to the different types of commodities available, commodity trading can be a suitable option for traders seeking to diversify their portfolios and lower concentration risk.

Benefit from Inflation

Inflation can harm many trades, but when it comes to commodities, in general, higher inflation can cause commodity prices to appreciate, hence affecting their value.

Disadvantages of Commodity Trading

High Volatility

Commodities can be very volatile especially when talking about energy commodities. Hence, before delving into commodity trading, you need to keep in mind that adverse commodity price swings can sometimes materialize. To learn more about market volatility read our “Volatility Explained”.

Susceptibility to Geopolitical Changes

Geopolitical factors and economic changes can affect commodity (for better or for worse) prices and induce this market’s volatility.

Key Factors Influencing Commodity Prices

Some of the main factors that can influence commodity prices include supply and demand, economic, climate, and geopolitical changes, as well as storage costs.

You can get an in-depth look at the factors affecting commodity prices in our “What Are the Main Drivers of Commodity Prices?” article.

Strategies for Successful Commodity Trading

There are many commodity trading strategies that you can adopt to increase your chances of success and Technical and Fundamental trading are some of the main ones.

Technical Trading

This type of trading analyzes commodities’ historical price charts and trading volumes to make more informed trading decisions.

You can find out more about technical trading in our “Technical Analysis for Beginners”.

Fundamental Trading

Fundamental trading refers to a trading method that uses a company’s financial performance and data to make trading decisions. Data can but is not limited to earnings reports, company events, and more. To learn more about fundamental analysis, check out our “Fundamental Analysis for Beginners” article.

Common Mistakes Beginners Make

Some of the most common mistakes new traders could make when trading commodities are overtrading and not knowing their limits, not diversifying their portfolio to distribute trading risks, and not planning for their trades in advance.

Other key trading mistakes and trading tips are covered in our “10 Trading Basics for Beginners”.

Conclusion

In conclusion, the commodity market, one of the oldest in existence, plays a vital role in both finance and our daily lives and the trading sphere as well and they can offer diverse trading opportunities.

Beginners can enter this market through various instruments such as futures, CFDs, and stocks. While advantages include high liquidity and portfolio diversification, challenges like volatility and geopolitical factors must be navigated.

Furthermore, adopting trading strategies like technical and fundamental analysis, and avoiding common pitfalls, sets the foundation for a successful commodity trading journey.

Commodity Trading for Beginners FAQs:

What's the difference between spot and futures trading?

The main difference between futures and spot trading is that the former involves the buying and selling of a contract with a predetermined time and the latter involves the buying and selling of assets on the spot (immediately).

How do I start with commodity trading?

You can start trading commodities CFDs by opening a trading account, and educating yourself on commodity markets, or even trying to trade with a demo account.

Is commodity trading risky?

Commodity trading can be risky as commodity markets are known to be volatile and affected by various factors.

Can I trade commodities from any country?

Yes, you can trade commodities from any country. However, you should keep in mind that the commodity market’s regulations may change from one country to another and that certain products might not be available in some countries.