Have you ever wondered how the cocoa or coffee that produces your decaf and chocolates gets to the producers? Well, that occurs through commodities traders who finance the deals between the suppliers and factories.
Many have seen the commodities market to be complicated when it is one of the simplest marketplaces on earth. There are different methods of trading commodities, the immediate (spot) trade, or for a particular price in the future (futures), and even forward commodities traders.
Anyone can learn how to invest in commodities markets. Knowledge of the industry is critical for anyone who wants to be successful. Between the producer of a commodity and the ultimate consumer, many parties use their financial resources to ensure they reach their destination.
People Sell Commodities Through Exchanges
Stocks get sold through exchanges. Commodities get sold through commodities exchanges.
Government agencies regulate the activities of these exchanges. In the United States, it is the Commodity Futures Trading Commission (CFTC). In the United Kingdom, it is the Financial Conduct Authority (FCA).
These entities regulate how commodity traders invest in the commodities markets. They also modulate how the trades occur.
Commodities Are Physical Assets
While stocks and bonds are financial assets, commodities are physical assets that are by financial assets. These assets get created during commodity trades. These physical assets won’t move from their owners to the buyers without the intervention of a financial ecosystem. This ecosystem makes producing and trading them profitable.
It includes traders, brokers, trade intermediaries, financial institutions, and so on. Most of the activities you see occur on exchanges have these parties running the show in the background.
Supply and Demand Play Critical Factors in Commodity Trades
Other financial markets are a little more complicated than commodity markets. However, supply and demand for commodities are the two forces that determine how prices work in this market.
There Are Two Major Pricing Setups in Commodity Markets
Commodity markets have two pricing setups. Spot prices refer to immediate trades that occur instantly. With futures prices, delivery of the physical assets happens at another date and time apart from when the said execution will occur.
According to industry terminology, the difference between spot and futures prices is called the basis. The scenario when spot prices are higher than futures prices is called backwardation. In a situation where future prices are higher than spot prices, the process is called contango.
Traders Make Profit using Three Techniques
Traders use three techniques to make a profit in the commodities markets. Producers sell goods to reduce their exposure to liabilities incurred in production.
Futures contracts provide financial inflows. Traders use funds to buy and sell these commodities to hedge their investments and make profits. Speculators buy or sell at spot or future prices based on their analysis of the supply or demand.
Trading commodities can be profitable from the proper perspective. We cannot underestimate the importance of commodities markets. Anyone can learn how to invest in commodities markets if they can understand the patterns of a specific commodity. That is, before moving to others.
It works if you try!
Note: Please do not invest money or assets in the financial markets that you cannot afford to lose. This article should not be construed to be investment advice and is for information purposes only.