Common examples of commodities trading include Gold, Silver, Crude oil, Brent oil and Natural gas.

The price of oil and gas has been the main headline in recent months, as some commodities have reached record heights over the course of this year. Consequently, this has many attracted investors to the commodities sector, according to Refinitiv, which reports a net inflow of $24 billion (£19 billion) into commodity funds in 2022. Moreover, with inflation at its highest level in 40 years, commodities trading also provides an opportunity for investors to profit from inflation above its rate.

Heres everything you should know about commodities trading, including varying types of commodity investments and the future prospects for the commodities trading sector.

What are Commodities？

Commodities traded in the global market are basically natural resources and raw materials derived from soils, minerals, or other sources that are utilized worldwide.

Generally, commodities can be classified into two categories:

• Soft commodities — Anything thats grown or reared: livestock and meat, as well as agricultural commodities like coffee, wheat, soybeans, cotton, and corn.

• Hard commodities — Anything thats mined or extracted: fossil fuels such as crude oil, natural gas, coal, and petrol; and metals such as gold, silver, palladium, copper, lithium, and aluminum.

There are several factors that influence the price of commodities, most notably the supply and demand. The price of the commodity will rise if there is an increase in demand for the product, or if there is a decrease in supply.

What is Commodities Trading？

Commodities are essentially bought and sold in large quantities through exchanges in the same way that stocks and shares are traded. There are four large commodity exchanges in the world, including, London Metal Exchange (LME), the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX), and the Intercontinental Exchange (ICE) in Europe.

Commodities differ from other goods in that they are interchangeable and standardized, with a centralized commodity exchange setting their values. Trading of commodities previously took place in a physical setting, but today most commodity trades take place online. The impact of demand and supply on these goods prices causes them to fluctuate constantly. Commodity trading allows traders to leverage these constant price fluctuations to their advantage and profit from them.

How do you trade in commodities？

The first step to commodities trading is to understand which commodities can be traded and which commodities should be traded to maximize your profits. As you might imagine, some commodities trade more actively than others.

The Feeder Cattle market, for example, may involve only the farmer and the distribution company, thereby not generating much activity. TradingView reports that Feeder Cattle traded 36,000 contracts in September 2019. It represents the number of feeder cattle contracts that have been purchased and sold.

There are, however, numerous companies involved in a market like oil, including public and government-backed companies, service companies, such as BP and Shell, and airlines, who buy and sell oil as a means of reducing fuel costs, as well as speculators. TradingView reports a nearly 14 million contract trading volume for Crude Oil for September 2019 - a significant difference from Feeder Cattle.

As you can see, it is clear that commodities like oil and natural gas have proven to be enormously beneficial, even today when wars are raging over natural resources. Even though its possible to trade physical commodities in many forms, futures contracts are the most popular. Essentially, a futures contract allows producers and buyers to agree on a price and terms for the delivery of a commodity in the future.

In commodity trading, the traders bet on the value of the commodity in the future. If a trader anticipates the price of the commodity will go up, he‘ll buy certain futures, referred to as ’going long‘. In contrast, if a trader thinks the price of the commodity will go down, he will sell some futures, a practice called “going short”. Commodities can also be traded in physical form by buying and holding them. You can use this method if you are looking to purchase gold, or other precious metals, but it isn’t practical when purchasing other commodities.

Read top crude oil trading tips and strategies to learn how to take advantage of the worlds dominant energy source.

What are the benefits of trading commodities？

While there are many reasons to trade commodities, there are three main reasons why commodities are an appealing investment for todays traders. These include the growing global population, inflation hedging, and portfolio diversification.

1. A hedge against inflation

It is widely known that inflation reduces the ‘real’ value of a currency over time. In other words, it means that $10 bought you less than 30 years ago, compared to today. Commodities, on the other hand, are subject to price increases in the future, which means it will take more dollars to be able to purchase the same number of commodities in the future compared to the current year.

Furthermore, inflation has reached a 40-year high of 9.1% in the UK, impacting certain types of assets returns. When companies cannot pass on higher costs to consumers, share prices may fall if profits are squeezed, and fixed-rate bond income is also reduced by high inflation.

By investing in commodities, however, returns have historically been positive when inflation is high, i.e., returns increase when inflation is high. As inflation measures include prices for commodities such as petrol and electricity in their ‘basket of representative items’, it doesnt come as a surprise. Hence traders who invest in commodities can protect themselves from these price increases, and potentially gain more profit from their investments in the future.

2. Portfolio diversification

Financial markets are always going to experience fluctuating levels of volatility at various times of the year based on consumer perceptions and confidence. Since a number of other factors can also affect market performance, including economic, legislative, and corporate factors, it can be difficult to determine which asset is right for an investor. This is where investment portfolio diversification comes into play.

In addition to the different types of assets such as cash, stocks, bonds, and properties, commodities can be considered as another form of asset that can assist investors in diversifying their investment portfolios. Gold can be viewed as a classic inflation hedge since its price tends to rise during inflationary periods and in response to a rise in consumer prices. Unlike other assets, precious metals offer unique inflationary protection. They offer intrinsic value, do not carry credit risk and cannot be inflated.

However, despite the fact that the commodity market typically performs well in times of high inflation, unlike equity markets and fixed-rate bonds, it is crucial to understand the variety of factors that affect commodity prices, including weather, natural hazards, and geopolitical events.

3. Population growth

Over the last century, the global population has grown exponentially, reaching 7.7 billion today. Although there has been a slowdown in growth over the past couple of years, it continues to rise at around 1% annually.

It can be argued that the growth in population leads to an increase in demand for infrastructure, which is likely to have a significant impact on both the demand for metals and the demand for energy commodities. In addition, the fact that there are more people means there are more mouths to feed, which will affect the demand for agricultural commodities as well.

It is likely that commodities prices will continue to increase over time as there will be more demand for commodities due to the increasing number of consumers.

What factors influence prices in the commodity market？

When it comes to trading with the commodities markets, a number of different factors must be taken into consideration, such as:

1. Supply and Demand — It is generally believed that if there is a limited supply of a commodity, the price of that commodity will rise. Conversely, if there is a higher supply, the price of a commodity is likely to fall. Supply is affected by the following variables:

• Climate change: Such as in the case of agricultural products.

• Changes in production costs: Because of efficiency improvements, technological advancements or operational changes.

• A change in the competitive landscape: for instance, if new competitors enter the market or existing competitors leave.

There is a possibility that oversupply (supply exceeding demand) can push prices down, but if demand rises above supply, a shortage can occur, which can likely lead to more price hikes. Traders should stay up to date with supply and demand conditions due to the rapid fluctuations that can result.

2. Economic Performance — In times of economic uncertainty, consumers may be less likely to spend, and this can lead to a drop in commodity prices. On the other hand, a booming economy would lead to an increase in demand for certain commodities, causing prices to rise until supplies catch up.

3. Politics — There is no doubt that political events can affect the price of commodities. A countrys export and import policies, for example, can significantly impact commodity prices. It is also possible for crude oil prices to rise if a government increases import duties.

4. Traders Behavior — Due to the fact that all traders have access to the same charting, there could be a herd of traders buying or selling in response to a particular pattern that can affect price movement as well.

How to get started with commodities trading？

Trading commodities is now very simple and straightforward if you choose to do so with AximTrade. Simply open a trading account with AximTrade and take advantage of both the commodity and forex markets with the best trading conditions and lowest capital you can invest.

The spread and margin requirements for commodities trading with AximTrade are among the lowest comparing other trading platforms. Traders are also given access to a wide range of tools and trading instruments in order to execute their trades with an informed perspective. As a result, you will be able to generate impressive earnings and reduce the risks associated with commodities trading.

Why Choose AximTrade？

AximTrade is a multi-asset broker and financial service provider with a set of advanced technologies and highly efficient trading platforms to enable traders to expand their abilities and opportunities. AximTrades standards of quality are uncompromising when it comes to transparency and integrity and is considered the best investment for beginners to start with. Know more about our exceptional trading conditions by checking the full AximTrade Review.

AximTrade stands out as the best broker in terms of its reliability and excellent trading conditions, offering Forex, Stocks, Crypto, Indices, Metals, and Energies, and facilitating in-depth market analysis using various tools accessible through the MT4 platform. Traders can choose from various types of trading accounts based on their capital and trading strategy. Choices include Standard Account, Cent Account, ECN Account and Infinite Leverage Account.

If you‘re a novice in forex and finding it difficult to take advantage of market movements, try AximTrade’s leading CopyTrade platform and start trading like a pro from day one. Take advantage of the flexibility to choose from hundreds of successful trading portfolios and choose the best for you to follow.

Original Article: Commodities Trading: Benefits of trading commodities with AximTrade

Disclaimer: This post is from Aximdaily and it is considered a marketing publication and does not constitute investment advice or research. Its content represents the general views of our editors and does not consider individual readers personal circumstances, investment experience, or current financial situation.