How The Commodity Markets Work
There are many assets available to trade in, as well as stocks and currencies; commodities are a popular choice with many. It is fair to say that these assets are probably the oldest form of money used as payment for goods for thousands of years. When it comes to derivative trading, there are many from which to choose.
A commodity is something which can be grown, mined or found as a natural resource and as such, is in high demand around the world. While traditionally these goods were traded on future exchanges, they are now available as binary options assets in which you can choose whether the price is likely to rise or fall.
Perhaps you are particularly keen on commodity trading and would like to know more about it. How did it begin, what sort of commodities can you trade in and why is it such a popular choice for so many investors? We take a look in further detail at this market and how it has grown over time to become the multi-million dollar business that it is today.
In this guide, you will learn:
- What they are and why they are so popular
- The history of this form of asset trading
- How you can trade in popular commodities
What is a Commodity
A commodity, in trading terms, is a natural substance or an agricultural product which can be bought or sold in exchange for other goods or currency. These materials include things like gold, silver, oil, copper and coffee in addition to livestock and many other naturally occurring substances.
While they may not all be grown in the same country, the same conditions and to the same quality, they retain the same value globally and are interchangeable. These globally recognised assets are usually traded through futures contracts on exchanges although derivative trading is also prevalent. As long as the commodity meets the required quality and quantity, it can be bought or sold at a specific price.
For investors, there are about 50 main commodity markets worldwide. Some of the more popular ones are, as you would expect, are those that we have already mentioned plus wheat, cocoa, fruit, sugar and soybeans. So, a commodity is anything that grows or occurs naturally. Metals such as gold and platinum are known as hard commodities
Commodity markets have been in existence in one form or another for thousands of years.
Brief History of Commodities
Commodity markets have been in existence in one form or another for thousands of years. Before money, these goods were a form of payment. Anything that you could grow or mine was a valuable asset. The Sumerians first used clay writing tablets in 4500 BC – 4000 BC to represent the number of goods alongside the date and time of delivery.
Of course, before gold and silver, livestock and seashells were more commonly used as currency. It was later when precious metals were discovered and first eyed for their beauty that gold and silver became a tradeable asset. Between the 10th and 13th-century, commodity markets grew and in the 16th-century commodity trading began on the Amsterdam Stock Exchange.
Commodity trading increased, and more stock exchanges added assets. Today, across the world’s exchanges, these assets are traded at a certain price for a specific amount by many of you.
The Popular Commodities
Unlike other trading assets like stocks, the popular commodities remain somewhat of a constant. Precious metals including gold, silver and platinum are always useful as are agricultural products such as wheat and rice. Other popular commodities include energy such as crude oil, natural gas and gasoline. Livestock is probably one of the longest traded commodities and includes hogs, pork bellies and live cattle.
Let’s not forget cotton which is one of the oldest fibres on the planet and, like livestock, has also been traded for thousands of years. The price of these popular commodities can have an impact on anyone. Let’s say you drive a car, and the cost of crude oil rises, then the cost of running that vehicle will go up. Everyone, not just traders are affected.
Soybeans are another popular commodity, often topping the list of most traded. If the price of soybeans swings, so does the cost of foodstuffs. The value of these goods has an impact around the world, and global news, natural disasters, wars, political campaigns and more can affect the value of these assets.
How Commodities are Traded
For thousands of years, people have traded in commodities on future exchanges. Of course, today these exchanges are all digital and much more modernised and regulated than they were. Now you can trade assets on the move. Let’s say you are particularly interested in trading in gold.
You can choose to invest and buy gold, or you can use derivative trading such as binary options trading to predict the price movement of the asset. If the price of gold rises by the expiry time that you have chosen, and you have predicted this correctly, you make money.
If it loses when you anticipate a rise, you lose. Rather than having to invest thousands of pounds in buying the commodity, you can instead choose to analyse market trends and predict the price movements.
While some people prefer to stick with just one or two different products, there are those that like to build a portfolio and to trade in whatever is experiencing significant movements for a particular reason. Trading is a very personal choice for many, and you can choose which assets you prefer to trade.
It is so accessible that anyone can do it on the move from their mobile phone. In this modern age of technology, commodities are still a hugely popular trading asset, all that has changed is how we trade.
Robert has consulted for our website for five years and is a well-established member of the team. While he is passionate about the site, most of Robert’s time is focused on his current position as CEO of a professional coaching company. Learn more.