The Basics of Commodities Trading

Commodity trading is where you buy and sell commodities for a profit.  A commodity is something that is considered valuable, comes in a standardized unit of measure and is often produced in large amounts.  You probably familiar with some commodities that are traded, coffee or precious metals are some examples.

Who invests in Commodity Trading?

Investors are one group that focus on trading commodities.  They pool their money together to spread the risk and with the hope of increasing the potential profits.  Then the other group who invests in commodities are retail investors.  These are individual commodity traders who trade with their own money on their own account, using a commodities broker.  They take advantage of price fluctuations to make a profit.

Why Trade Commodities?

Commodities are traded for the enormous profit potential and for diversification in some cases.  Commodities are inversely correlated to stocks and bonds.  What that means is when the price of stock goes up then typically the price of commodities goes down.  If you understand this cycle then the potential for profit can be huge.

How to Trade Commodities?

Let’s say you have been watching the price of gold for the last few weeks and it has been steadily rising, you expect that trend to continue and would like to profit from it.   Investing in gold futures is more profitable than actually buying gold.  Here are some other things you need to take into consideration when buying futures.

  1. The amount of gold in the contract
  2. The price you’re buying at in the contract.
  3. The expiry of the contract.

Before Your Trade Commodities

Before you start trade commodities you need to learn about the specifications of each and every commodity that is mandated by the exchange.  On top of that you should learn some basic trading strategies.  It is much like any other investment product “buy low and sell high”.  You will need an account with a broker and provide them with the documents that establish your identity.  You will also need to provide bank details if you ever want to receive payment for your trades.

Commodity trading can be considered a high risk investment so as with any investment product don’t gamble with money that you can’t afford to lose.  Commodities trading can be highly lucrative and can be a sound part of any investment strategy.  Make sure that you include commodities as part of your portfolio.

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