What Are Commodities and How to Trade Them?
Information is not investment advice.
Since the beginning of human civilization, commodities have been a vital investment asset. In short, a commodity is a basic good or raw material that people buy and sell. Usually, commodities are the building blocks for more complex goods and services.
Commodity trading covers the buying and selling of a broad range of instruments, including oil and gas, metals, and other primary processing products like coffee, corn, and sugar. For investors, commodities are an important way to diversify their trading portfolios.
Commodities are risky investments because their market is impacted by circumstances impossible to predict – unusual weather patterns, epidemics, natural and human-made disasters. If you want to trade commodities, you always need to keep up to date with the latest news.
What kinds of commodities exist?
There are four main categories of commodities on the market:
- Agricultural: raw goods such as coffee beans, corn, sugar, etc.
- Energy: petrol products like oil and gas.
- Metal: precious metals such as gold, silver, platinum, and base metals like copper.
- Livestock: domesticated animals producing goods such as meat, eggs, milk, fur, leather, wool, etc.
Commodities also split into hard and soft ones. Hard commodities are natural resources that must be mined or extracted (gold, oil, etc.), while soft commodities are agricultural products or livestock (wheat, sugar, hides, etc.)
How to trade commodities?
Trading commodities doesn't quite differ from trading currency pairs. But let's have a look at the step-by-step instruction on how to do it:
- Choose a broker
FBS offers excellent products, good service, and no commissions. With FBS, you can access the largest commodities traded in the market: Palladium, Platinum, Silver, and Gold.
- Choose to buy or to sell
After you choose a commodity for trading, you need to understand whether you want to buy or sell it. If you think the prices will rise, buy. If you think the prices will fall, sell.
- Manage risks
Commodities are a very volatile market. Ensure you select an order from a range of stop-loss orders to guarantee you will limit your potential losses.
- Monitor everything you can
After placing your trade, monitor your open positions to follow your real-time profit or loss.
- Close your position
Close your trade when you are ready.
Can you make money trading commodities?
Commodity trading has its advantages and disadvantages. The main advantage of commodities is that their performance is not strictly dependent on the equity and bond markets. This reduces the overall risk for investors who want to build a diversified portfolio.
Commodity markets usually are very liquid, meaning you can quickly enter and exit them. Although it’s not a get-rich-quick scheme, commodities can potentially give huge profits if traded carefully and smartly.
The disadvantages of commodity trading are that markets are volatile, which means risk is higher, especially for new and non-experienced investors. So, be careful and get ready for any outcome – you can win big or lose big.
At FBS, you can trade precious metals at both Standard and Cent accounts. If you are still unsure whether you want to add commodities into your trading portfolio, try our demo accounts before entering the real market.