Commodity Trading: How Does It Work and What Are The Benefits?

The online trading economy is expected to grow at a staggering rate. People have realized the importance of multiple income streams, specifically after the onset of the COVID-19 crisis. Commodity trading offers a lucrative opportunity to people willing to invest their extra savings to establish a side hustle. 

Commodity trading is so popular because the prices of essential commodities such as precious metals, energy resources, livestock, and agricultural produce remain regulated throughout the world. The extra oversight provided by government regulatory agencies is an added benefit that cuts through the confusion presented by price fluctuations and volatility in other markets, such as currency trading. 

Before we establish the set of benefits Commodity Trading offers individual traders and exporters, let’s explain what this type of trading entails.

What Is Commodity Trading?

As the term intuitively suggests, Commodity trading deals with the trading of essential goods termed as commodities. These include several domains of goods such as precious metals (predominantly gold and silver), energy resources such as oil and gas, and agricultural goods that include coffee, sugar, wheat, soybean, pulses, and livestock.

Commodities derive their value from two things: their demand and scarcity. These resources are either naturally occurring or grown in specific parts of the world, meaning an infinite supply can never be maintained. Furthermore, since the global trade ecosystem is premised on the foundation of competitive advantage, not all nations can produce all goods sustainably. This makes commodities raw materials for vital industries. Stop and think about the power sector devoid of gas and oil- inevitably, it would cease to exist. This tells us the importance of commodity trading. 

In the commodity trading market, these goods are traded as futures contracts or contracts for difference (CFDs). To start with CFD commodity trading, accessing trusted brokers such as those at FX-List.com/commodity-forex-brokers can be a career-revolutionizing breakthrough for a trader stepping into the realm of community trading.

Commodity trading is a highly leveraged market. Goods can be accessed in a range of ways which include physical holdings and through correlated markets. With a multitude of holding options available, there is a chance for different types of investors to find a grounding that suits their work ethic.

Benefits of Commodity Trading

Highly Leveraged Trading Potential

As discussed before, trading in commodities enables leverage for traders. Traders can adopt a certain position in a commodity by only investing a percentage of the value as a margin. If you are trading in the futures market mode,, these margins become considerably lower,, which is an added benefit when compared to equity and options trading.

Less Room For Price Manipulation

Since essential commodities form the backbone of worldwide consumption, government regulation is ensured for the prices. This is a significant benefit as it reduces the room for price manipulation and speculative bubbles. Not only is commodity trading less risky, but it it is also more dependable when evaluating regular earning potential. Government regulation also protects against price rigging, which is much more profound in other trading markets.

Great For Investment Diversification

After a certain trading time, every investor looks to diversify their trading portfolio. This protects them from setbacks faced in one domain. If one market crashes, they can recover and still have a thriving livelihood in some other domain. This is exactly what Commodity trading offers.

Commodities in themselves are independent asset classes; they can protect an unpredictable, volatile situation. For instance, if one commodity is likely to suffer due to a trade embargo or geopolitical disturbance, traders can quickly secure this investment by opting for another commodity. 

Benefits for Exporters and Producers

Commodities are often dealt with by exporters within the global trade ecosystem. Exporters can exclusively benefit from commodity trading. Firstly, they can nullify the effect of future price fluctuations by adopting the commodity futures type of trading. This allows them to buy or sell at a price decided considerably before the actual transaction takes place, giving them a buffer to flesh out any price volatility.

Producers can also benefit from the same phenomenon. Since they can lock in a price before the actual selling is carried out, they can protect themselves against potential decreases in prices. This not only saves them from losses but also ensures they don’t run a fiscal debt.