Commodities market form the basis of the international trade system. Knowledge of how to trade commodities is essential for any trader. Solid expertise promises a good chance of making profit, so let’s find out, which are the most widely traded commodities and why.
What are commodities and how did they evolve?
A commodity is a raw material, or a basic good in commerce that can be bought and sold by individuals and various institutions. They usually work as a basis for more complicated services and goods.
Commodities are usually grown, extracted, traded and produced in large quantities, supporting the efficiency of global trading markets.
The history of commodities goes back to the beginning of ancient civilization. According to research, rice might have been the first commodity that was traded around 6,000 years ago.
Later, the ancient Romans and Greeks, started using silver and gold as the currencies for commodities transactions. These metals eventually evolved into monetary assets that have become the preferred means of payment in commerce, making gold the #1 world’s traded commodity.
What are the main commodities?
Though the four major classes include dozens of various commodities, we’ve got another interesting player on the market – cryptocurrencies.
Cryptocurrencies: a new type of commodity?
The term cryptocurrency refers to a wide variety of digital tokens, designed to serve as a form of digital currency, payment network, store of value, etc. All the processed transactions are performed though blockchain technology, which serves as a giant digital ledger. The most popular cryptocurrencies, other than the most famous Bitcoin (BTC), include: Litecoin (LTC), Ethereum (ETH), Zcash (ZEC), Dash (DASH), Ripple (XRP), Monero (XMR), Bitcoin Cash (BCH), NEO (NEO), Cordano (ADA), and EOS (EOS).
Cryptocurrencies are a relatively new type of asset on the financial markets. Experts argue that cryptocurrencies should still be classified as currencies, however, they forget about the fact that one of the major features of any fiat currency is government regulation and centralisation, which doesn’t apply to the crypto world.
Some newest cryptocurrencies even tend to be closer to securities, because many ICO tokens resemble the role of shares in a company.
However, the huge variety of available altcoins don’t give us a chance to define them as simply currencies or securities. In this case, a way better analogue for cryptocurrencies would be real-world commodities. It is no wonder that Bitcoin is often referred to “digital gold”. Perhaps for this reason many cryptocurrencies are ‘mined’.
After we’ve divided all the commodities into the major classes, it’s time to define the leaders in the world of commodities trading.
Investing in commodities: how to start commodity trading today
The commodities market forms the basis of the world’s trading system. There is no trader, who doesn’t know anything about commodities and has never tried to use them in order to diversify their portfolio or for hedging purposes.
Due to the development of modern online trading platforms, commodity trading has become available even to private traders with a relatively modest level of capital.
There are several major reasons to start trading commodities, including:
- Population growth
The amount of the urban population is constantly increasing and will reach 6.4 billion inhabitants by 2050. The trend may cause a huge demand for metals and energy commodities, used for building cities’ infrastructure and satisfying people’s needs for electricity.
- Inflation hedge
Commodities serve as a popular means of hedging against inflation. For example, a weak dollar position may create inflation and can contribute to higher commodity prices.
- Portfolio diversification
It’s common knowledge that a successful portfolio should include various assets. Sticking exclusively to stocks or bonds can prove to be an inefficient strategy. Commodities can be used to diversify and reduce the risk of your trading portfolio.
Today, instead of entering traditional commodity markets with traditional exchanges and dealing with real assets, you have another option to go with – contracts for difference (CFDs).
CFDs have become the perfect solution for those, who don’t want to acquire and sell the real commodities, and just want to benefit from the price fluctuations of the underlying assets.
Attracting more and more followers, CFDs let you trade any commodity you want, even if you have limited funds on your trading account. As a leveraged product, trading CFDs requires only a portion of your personal money to open a trade. The rest is covered by your trading platform provider and is called margin.
Important: If you trade CFDs on commodities, please, bear in mind that many retail investors lose money when trading. You should consider whether you can afford to take the risk.