Sectors of Commodity Trading
There are four primary sectors in which commodity trading takes place. Each sector has a different focus, and therefore a different mix of commodities will be found within each one. Energy commodities are those that are derived from crude oil and natural gas. These include a wide variety of different commodities, including gasoline and diesel fuel, natural gas, crude oil, and some other products. Metals and mining commodities are materials used primarily in the production of a wide variety of goods across many different sectors of the economy. Among the most well-known metals and mining commodities are iron, copper, gold, silver, and platinum. Agricultural commodities include a wide variety of foodstuffs produced for consumption by humans, including corn, wheat, soybeans, and rice. In some cases, livestock and meat are also included in this category.
a. Energy Commodities
As the name implies, energy commodities are those that are derived from crude oil and natural gas. These commodities are primarily used as inputs in the production of other types of commodities, such as plastics, fertilizers, and fabrics. Energy commodities also have additional uses within the global energy sector. The most popular energy commodities include crude oil, natural gas, gasoline, and diesel fuel. Oil is typically bought and sold in barrels, with each barrel representing a certain volume of the commodity. One standard crude oil barrel is equivalent to approximately 159 liters, or 42 U.S. gallons. Crude oil prices are often quoted in terms of U.S. dollars per barrel. Natural gas prices are typically quoted in terms of dollars per thousand cubic feet (Mcf), and gasoline and diesel prices are often quoted in dollars per gallon.
b. Metals and Mining Commodities
Metals and mining commodities are those that are used primarily in the production of a wide variety of goods across many different sectors of the economy. Among the most well-known metals and mining commodities are iron, copper, gold, silver, and platinum. Iron is used in the production of a variety of different goods, including automobiles, machinery, appliances, and other industrial equipment. Iron is primarily traded in terms of metric tons. Copper is used in electrical wiring and plumbing. Copper is primarily traded in terms of metric tons, with some exchanges also listing prices per pound. Gold is used in the production of several different goods, including jewelry and electronics such as circuit boards. Gold is primarily traded in terms of troy ounces. Silver is primarily used in the production of electrical wiring and photography. Silver is primarily traded in terms of troy ounces. Platinum is primarily used in the production of automobiles, jewelry, and industrial equipment. Platinum is primarily traded in terms of troy ounces.
c. Agricultural Commodities
Agricultural commodities are those that are produced for human consumption, including corn, wheat, soybeans, and rice. In some cases, livestock and meat are also included in this category. Corn is primarily grown and traded in the United States, and is used primarily as feedstock for livestock and to produce ethanol. Corn is primarily traded in terms of bushels, with each bushel representing approximately amount of 56 pounds. Wheat is grown primarily in Asia and the United States and is used in the production of a wide variety of foodstuffs, including bread, pasta, and a variety of other foods. Wheat is primarily traded in terms of bushels, with each bushel representing approximately 30 pounds. Soybeans are primarily grown in Asia and North America and are used in the production of foodstuffs, livestock feed, and a variety of other products. Soybeans are primarily traded in terms of bushels. Rice is primarily grown and traded in Asia and is used in the production of foodstuffs. Rice is primarily traded in terms of tons.
Benefits of Commodity Trading
Commodity trading offers several benefits for investors. First, commodity trading provides diversification. With the different commodity sectors, you can spread your investments across many different types of products, thereby reducing your overall risk. Secondly, commodity trading provides liquidity. The different commodity markets have daily trading volumes, enabling you to buy and sell assets quickly and efficiently. Finally, commodity trading is cost-effective. While there are costs associated with trading commodities, they are generally lower than those associated with trading stocks or other types of assets.
Risks of Commodity Trading
While commodity trading has many benefits, it also comes with several risks. First, it is important to note that commodity trading is not regulated like other asset classes, such as stocks or bonds. This means that there is less regulatory oversight and therefore less investor protection. Another risk associated with commodity trading is the fact that it is an extremely volatile asset class. The trading of commodities is highly cyclical, and therefore the risk of losing money is high. Investors should have a long-term outlook when trading commodities, as short-term movements are generally too volatile to be profitable.
