If you’re reading this, you’re probably interested in or at least curious about trading commodities, but you might not know how to get started or if it’s the kind of investment you want to make.
What are Commodities?
To decide if you should trade commodities, you should probably know what they are (if you don’t already): A commodity is a raw material or agricultural product that can be bought and sold. You can turn your money into commodities by buying and selling commodities. A commodities market is any market, real or online, where you can buy and sell commodities. There are three types of goods: soft goods, hard goods, and energy goods.
- Soft goods like coffee beans, lumber, meat, sugar
- Hard commodities are things like gold, silver, palladium, etc. that are mined and used as raw materials.
- Energy commodities refer to materials used to produce energy, such as oil, natural gas, ethanol, coal, and the like.
- There are 100 primary commodities in total, and 50 of them are called “major commodities”.
In total, there are 100 primary commodities, half of which are considered major commodities.
How are commodities bought and sold?
You can buy real commodities and keep them, but most trades are done through futures contracts and commodities exchanges. In history, the first known market for goods was in ancient Sumer between 4500 and 4000 BCE. The contracts were written on clay tablets and said how much of each good (like goats or wheat) would be delivered. They were similar to futures contracts that are used today.
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Pros of Trading in Goods
- Diversification:- When you look at historical data, you’ll see that the relationship between the prices of commodities and the prices of stocks and bonds is weak to negative. You can protect your stock investments this way.
- Inflation Protection:- Bonds and stocks lose value because of inflation, but commodities seem to gain value. This makes sense, since inflation makes the prices of goods go up, and so do the prices of the raw materials used to make those goods.
- Exposure to Growth Opportunities:-As time goes on, the price of a good goes up because more people want it. For example, the price of Palladium Futures has more than doubled in the last two years because it is used to make important car parts.
Trading in goods – Cons
Some of the most volatile things to trade are commodities. On average, commodities are twice as volatile as stocks and four times as volatile as bonds.