In the trading world, commodities are any raw materials that are either used to create other products, or that are consumed directly, such as food. These materials also include energy sources like gas and oil, natural resources like agricultural products and timber, or precious metals like platinum and gold. As such, commodities investing is the process of trading such materials as these on the global marketplace as part of diversified investment portfolios.
There are a couple of ways that one can go about investing in commodities. One way is purchasing varying amounts of a raw commodity, such as a precious metal. Another way of investing in commodities is through using exchange traded products or futures contracts that directly track specific commodity indexes. These investments are highly complex and volatile and are generally recommended for savvy, experienced and veteran traders.
Another way to get exposure to commodities is through taking up mutual funds that directly invest in commodity-related businesses. For example, a gas and oil fund could own stocks issued by a company or companies involved in energy refining, exploration, distribution, and storage.
Core Commodities Traded
When it comes to commodities investing, traded commodities are classified into four basic categories. These are:
- Energy (including heating oil, gasoline, natural gas, and crude oil)
- Metals (including Copper, platinum, silver and gold)
- Livestock and meat (including feeder cattle, live cattle, pork bellies and lean hogs)
- Agricultural (including sugar, cotton, cocoa, coffee, wheat, soybeans, corn and rice)
The History Of Commodities Trading And Its Effect On The Economy And Society
The commodities market has been around for some time and has had a substantial economic impact, historically and in modern times, on people and nations. While the impact this market has had throughout history is not fully understood, it is believed that rice futures might have been traded in China from as early as 6,000 years ago.
So important is this market that shortages of essential commodities has sparked wars – with a good example being WW II when Japan attacked foreign lands to secure rubber and oil. At the same time, the commodities market has considerable power over an economy considering an oversupply of commodities can have devastating effects on a region as it could make core commodities lose their value.
As mentioned above, this form of trading has been around for some time. Ancient societies traded a wide variety of commodities. And while, the quality of the products, transportation methods and dates of delivery were often unreliable, the trading of commodities was an essential business. In modern times, however, things have changed, and trading is now controlled and rather competitive.
Modern Day Commodities Investing
In modern day online futures trading of commodities, the process is rather complicated and quite volatile as prices fluctuate wildly. As such, it is advisable that one does not venture into this form of trading unless they are experienced, or are willing to play against the odds.
Investors dealing in commodities almost never sell or buy them outright. Instead, they purchase a contract or contracts to either sell or buy a commodity/commodities they are looking to invest in at a future date and a set price. This form of trading contract is what’s known as a futures contract.
Often, investors will sell their contract before the date of delivery because they do not actually want to own the product or commodity they invested in – they are just betting on which way the commodity’s price will move. A long futures contract basically means that the investor is betting on the fact that prices will rise while a short futures contract means that he or she is betting on the prices falling.
In conclusion, trading in commodities is rather risky as the value of the commodities themselves tends to fluctuate precariously over time; however, built on a stable asset allocation strategy, commodities investing can, and will bring better risk-adjusted returns.
For more updates on futures commodity trading, visit the RJO Futures Twitter feed.