How to Trade Commodities – What Are Commodities?
Even in the present economic climate, with the markets fluctuating wildly, many people and companies are still making money by investing in commodities. For amateur investors, though, the commodity market can be daunting: while the workings of the stock market are known at least in part by most laymen, the commodity market is less understood. For the beginner wanting to learn how to trade commodities, knowledge of the basic aspects of commodities and the commodity market is essential.
Commodities are basic traded goods with a number of common properties. They have traditionally been primary goods; that is goods that have not been processed. Examples of this are wheat and copper. They also have internationally agreed quality standards: this is important because traders might buy and sell commodities without even seeing them and having the chance to test them. Since commodities have agreed standards which are verified by officials in the particular commodity exchanges, the commodities can be quickly and efficiently sold and transferred. Further to this, commodities are always traded in certain standard weights or volumes, such as tons, bushels or troy ounces. All of this means that there is no haggling over either quality or quantity: traders can base their decisions on market conditions and other external factors affecting price.
There is a wide range of commodities, and they can be split into groups. Agricultural commodities encompass grains, pulses and other similar farmed products: examples are soybeans, cotton, wheat and sugar. They are usually traded in pounds (lbs), tons or bushels. Other farmed goods that are traded fall into a different class: livestock and meat commodities. Traded in lbs, this group includes such goods as frozen pork bellies and live cattle. Energy commodities involve the different versions of oil and gas traded on the international commodity exchanges, and are sold in barrels and British Thermal Units respectively (though ethanol is sold in gallons). There are two groups of metals: precious metals and industrial metals. The former group includes metals such as gold and silver, and are traded in troy ounces; the latter group includes copper, zinc and tin, and are traded in metric tonnes. There are also a number of commodities that do not fall into any particular group: amongst others, these include palm oil and polypropylene.
But when trading commodities, it is not enough to know what commodities are: an intimate knowledge of the commodities being bought or sold is essential. A large number of factors can affect the price of each individual commodity, including supply and demand, weather conditions, natural disasters, government policy, advancements in technology and more. It is strongly advised that anyone wishing to trade in commodities researches thoroughly first.
Author: Mike Drabble
Article Source: EzineArticles.com
Provided by: Guest blogger
