Commodities trading: What is it?
As the 21st century progresses, it becomes increasingly apparent that commodities trading plays an ever-greater role in the economies of virtually all countries. This article will cover the basics of what commodities trading is and how it works.
Commodities are raw materials or primary agricultural products with a high enough demand to be traded on the market. For example, many investors purchase oil because they believe that its value will increase over time. Other examples include maise, cattle, cotton, sugar and gold.
Types of commodities
The number of commodities available on the market far exceeds the list of what most people think of as commodities: coffee, oil and corn, for example. Many of these items are “commodities,” but countless others may be less familiar to those outside the industry.
A commodity is an essential good in the market that you can trade. Some examples of how they are usually defined are agricultural products, precious metals, and electrical energy. These are often referred to as primary commodities because they are produced by companies involved in agriculture or mining. An example would be wheat or gold.
A secondary commodity is derived from a primary commodity. An example would be the use of wheat to create various products such as wine, flour, and animal feed.
A tertiary commodity is not some exchanges trade is a primary or secondary good but has been further processed so it can be more valuable in some way before being sold. A typical example would be flour production. Flour is a tertiary commodity because it is not the final product but has undergone further processing to become valuable.
Where are commodities traded?
Commodities are generally traded in one of two types of markets: Over-the-counter or on an exchange. The OTC market consists of companies that have reached individual arrangements with one another. The commodities are then traded between the companies, depending on what they have agreed upon. An example of this is an oil futures contract traded through the OTC market.
On the other hand, some exchanges trade standardised contracts regarding quantity and quality specifications for commodities like gold, silver, crude oil, petroleum products, coffee, cotton, and sugar. The best-known exchanges are the Chicago Board of Trade (CBOT), New York Mercantile Exchange (NYME) and IntercontinentalExchange (ICE).
Commodities and CFDs
A CFD is a deal between two parties to exchange the difference in the value of an underlying asset. Consider a commodity rather than dealing with the asset itself.
With low margins and commissions per trade, most people need to see movements in some of these commodities. They’re often traded in Contracts for Difference (or CFDs). A futures contract is an agreement between two parties to purchase or sell a commodity at a specific future date for a fixed price agreed upon today.
How to trade commodities in Singapore
To begin trading in commodities, you need to start by opening a commodity trading account. Opening an account with one of the many Singaporean brokerages is relatively easy, and costs vary across companies. Brokerage fees are usually around 1% for buying or selling commodities.
Before buying or selling any commodity futures, you must be approved for margin trading and a specific commodity. To make an application, you need to complete an application form and submit it to the brokerage, together with some personal identification documentation.
You can trade in most commodities, including metals such as gold and silver, oil products like Brent Crude Oil and gas such as natural gas (methane). Some of the most popular commodities traded in Singapore are coffee, cocoa, soybeans and sugar.
The commodity market is one of the most critical aspects of global trade there is. If you are interested in commodities trading, turn to reputable online brokers Saxo Bank, for the best advice. Try one of their demo accounts to practice trading before investing your own money.