Alpari deliver CFD and forex trading across a range of markets. Here, they explain how to trade commodities using a range of investment vehicles on their platform.
What Are Commodities?
Commodities are natural resources or foods, often the raw materials for manufacturing. Cotton, wheat, soybeans, cattle, lumber, natural gas, coffee, rice and sugar are just a few examples.
In commerce, they become basic goods that are interchangeable with others of the same type and form one of the major asset classes.
Crude oil, gold, and silver are the most frequently traded commodities.
How Does Commodity Trading Work?
As an individual trader, you don’t need to physically own a commodity to gain from it. You can buy or trade a commodity, then profit from changes in its price through various financial instruments:
A futures contract is an agreement to exchange a certain amount of a commodity at a future date. As the buyer, you pay for the contract at the time of purchase. If the price rises between the purchase date and the date the contract expires, you make a profit.
With an options contract, you have the right to buy or sell a commodity at a later date, at an agreed price. Unlike futures, traders don’t have to buy or sell at the end of the contract if they choose not to.
Spot Commodity Trading
A spot commodity is different from a futures or option contract – where the commodity is exchanged at some point in the future. In the spot market, commodities are traded on the current market, with the aim of making profits on small movements in prices. The idea is either to go long when you believe the commodity’s price is rising, or short when you expect it to fall.
It’s always important to remember, however, that losses still occur with commodity trading and you should always trade responsibly.
- High leverage: You can take a position in a commodity by paying only a fraction of the value as margin. Also, the margins in the commodity futures market are lower than with equity futures and options.
- Less manipulation: Commodity markets are less likely to be rigged or manipulated because they’re governed by international price movements.
- Diversification: As an independent asset class, commodities are a good way to diversify your portfolio.
Commodities offer an exciting and rewarding way to trade the markets. At Alpari International, we provide an easy-to-use trading platform, with all the tools, metrics, analysis and support you need for a great trading experience.
To help you get used to the process without risking your own money, you can practice with a simulated trading account.
Think you’re ready to give it a go? Open a demo account with Alpari International today.
To learn more about the world of commodity trading, check out the helpful guide on the Alpari Education section.
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