Coffee Break: Are You Ready to Invest in Commodities?

The commodities market forms the basis of the international trade system. The knowledge and understanding of how to invest in commodities is absolutely essential for every trader who takes their trading experience seriously.

Today, we’ll try to help you learn what a commodity is, what drives commodity prices, where and how to buy commodities and trade them.

What is a commodity?

Commodities trace their roots to the very start of a human civilisation. According to some evidence, rice might have served as the first commodity around 6,000 years ago, when the Chinese started trading it.

Commodity is a basic good or a raw material in commerce that often serves as a ‘building block’ for other complex services and goods. It can be bought and sold by institutions and individuals. Take a few minutes to watch a short video and get a clear understanding of what commodities really are:

What are the main commodities?

There are four major types of commodities:

Cryptocurrencies: a new sort of commodity?

Cryptocurrencies are a unique type of asset that is not so easy to classify. There are still many arguments, whether ‘currency’ is the proper name for Bitcoin and all other Altcoins due to their decentralised nature and absence of government interference.

Perhaps, a much better classification for cryptocurrencies would be digital-world commodities. Small wonder that Bitcoin is often regarded as the ‘digital gold’ and crypto is ‘mined’.

Like cryptocurrencies, commodities are usually free from centralised control and their value is defined by market factors. The same as commodities, cryptocurrencies are considered a speculative asset and ideally can be exchanged for services and goods.

What are the main drivers for commodity prices?

Every commodity has its own particular factors that influence its price. However, we can define several generic factors that usually drive the majority of commodities. They include:

• Emerging markets' demand  Rapidly developing economies, like China and India have an increasing demand of various raw materials, goods, livestock, metals, etc.
• Supplies  The abundance or scarcity of commodities may significantly drive their prices. The amount of commodity supplies, in its turn, depends on environmental, political and labour factors.
• The US dollar rate  Acting as the world’s reserve currency, the US dollar affects commodity prices. When the dollar is strong, the commodity sellers get fewer dollars, and vice versa, when the currency is weak, the amount of dollars rises.
• Substitutes When the price of a certain commodity climbs, the demand for cheaper substitutes grows accordingly. That's how aluminium often substitutes copper, and corn can interchange with wheat, etc.
• Weather Weather has always been a significant commodity price driver. Agricultural, energy and other sectors may suffer from excessive rainfalls, long droughts, severe winters, storms, hurricanes, etc.

How to buy commodities? Top global commodity exchanges

The 21st century launched a new era of online trading. Electronic marketplaces successfully substituted physical trading floors. This change drastically affected commodity futures markets. Today, millions of people all over the world can access the global commodities markets. The top international commodity exchanges are the following:

• CME– the Chicago Mercantile Exchange
• CBOT– the Chicago Board of Trade
• NYMEX – the New York Mercantile Exchange
• ICE– Intercontinental Exchange
• LME– London Metals Exchange
• ASX– Australian Securities Exchange
• TOCOM– Tokyo Commodity Exchange

How to invest in commodities?

There are different ways to invest in commodities. You can always physically buy and store them, but do you actually need to? For the majority of investors, the method of physical delivery makes no sense, as they do not actually want to have these assets, but only trade them.

Therefore, instead of physical delivery, traders may choose other popular options, such as: futures, options on futures, commodity shares, commodity ETFs or CFDs.

Trading CFDs, a trader gets the opportunity to access all the commodity markets and prices without the need to buy shares, futures, options or ETFs.