Commodity Exchanges offer the facilities for the organized marketing of most commodities. These include grain, wheat, cocoa, sugar, soya beans, wool and livestock. It also includes metals and minerals, such as gold, silver, copper and tin.
The rationale behind this marketplace is to allow commodity producers to sell their produce in advance of delivering them. By doing this they are able to ‘hedge’, i.e. ensure a minimum price which they will receive, and hence secure financing from their bank.
The process of commodity trading, also known as futures trading, is where Commodity buyers and sellers are hedging risk, or speculating. You do not actually buy anything or own anything. A speculator risks capital for a spectacular gain – buying commodity futures when the price is presumed low and selling when high! Prices vary due to both internal and external influences eg weather conditions, and political change or unrest.
The participation of these speculators increases the likelihood that a sale can be made, i.e. that a current market price exists. It also injects into the market an additional party willing to accept risk in return for an expected margin. Relatively risk-averse producers are complemented by specialists whose livelihood is made by managing risk.
With stock trading and share trading, traders only sell securities which they already possess – ‘short-selling’ is generally prohibited. In futures trading there is no such limitation, and therefore speculators can enter the market as buyers or as sellers.
In addition to speculators, both the commodity’s commercial producers and commercial consumers also participate. The principal economic purpose of the futures markets is for these commercial participants to eliminate their risk from changing prices.
To enable you to make informed decisions about when to trade commodity futures, it is important to have a source of price data. Many daily newspapers carry some commodity prices in their financial sections. The Wall Street Journal has comprehensive commodity price listings. Investor’s Business Daily has both price tables and numerous price charts.
Experienced commodity traders prefer to look at price activity on a chart rather than trying to interpret tables of numbers. In financial analysis, charts are imperative for quickly understanding the historical and recent price action.
Remember how professional trader and money manager Russell Sands describes the makeup of a successful trader: “Intelligence alone does not make a great trader. Success is equal parts of intellect, applied psychology, practice, discipline, bankroll, self-understanding and emotional control.”
So – learning to trade is a mixture of being exposed to ideas plus studying the markets on a day-to-day basis. Beware – this is not something that happens overnight – it does take time – so – do not become impatient. AND bear in mind that the Commodity Market is described as profitable, risky and complex!