How Does Commodity Trading Work?

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How Does Commodity Trading Work?
How Does Commodity Trading Work? (Image: www.fxodyssey.net, www.ehow.com, www.scotland.gov.uk, www.treehugger.com)

Commodity Trading

Commodities within financial trading include the trading of physical goods or raw products. These goods and products include various foods, livestock, fuel, as well as precious and industrial metals that are exchanged and traded. Commodities are like trading cash or stock.

Basically, with commodity trading you are making a bet on the future value of the commodity. This is similar to when you trade stock or cash that is purchased and sold in standardized contracts. When buying or selling commodities, you are selling the ownership of a commodity just like you would if you were to buy or sell something in a store. However, because most commodities are not realistic when you're buying and selling, most commodities trading is mostly looked at as future trading. You can buy or sell your commodity at a certain price on a particular date. This is referred to as forward contracts. For instance, on Tuesday, you might enter into an agreement to sell a product at $75 on Friday and if the price of the commodity is $76 on Friday, you can now buy the commodity for less than it's real cost. But, if the price of the product is $74 on Friday, your forward contract is of no value, and therefore not a good investment because no one desires to buy commodities above market value.

Commodities is like trading cash or stock
Commodities is like trading cash or stock

Commodity Trading and the Economy

Commodity trading influences the economy by helping to make public predictions about future prices of goods that are significant within the market. One example is oil. Oil within the commodity trading is the most widely watched commodity. This is because the price of oil changes daily which has a great effect on other goods and services that are produced in the United States. People who trade take this into account because oil supply and demand, politics and geography all influence and affect oil prices.

Commodities Trading Chart
Commodities Trading Chart

Commodities Trading, Risks and Opportunities

In comparison to the stock market, commodity trading is a lot faster. This is because an investor can make money a lot faster when good research, good product trading guidance and/or good instinct is involved. However, a lot can be lost just as fast with a worthless contract. Therefore, it is important to be careful when trading. Commodities trading does not require a lot of upfront investment. However, brokerage houses generally demand "50 percent of the stock's value." As an investor, you can speculate the costs of your commodities to be as little as ten to 15 percent of the value. Therefore, it is important to make sure that one can cover all expenses involved in commodity trading.

Commodities Trading Graph
Commodities Trading Graph

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