Now we’ve gone over the basics of what commodities trading is and how it began, now it’s time for the good stuff: how to actually get started with commodities trading and what your options are!
(Firstly, we’d like to thank Investopedia for some of this information)
Commodities markets are very likely the most important and impactful form of trading. Shortages can effect nations and can start wars, while oversupply can destroy industries and break down economies. Energy commodities especially are monitored closely by governments, businesses and average citizens. Think of crude oil constantly being talked about, as it’s a much-needed resource. This means commodities are affected almost daily and in innumerable ways by governments.
As such, commodities trading used to be reserved only to the very rich, and knowledgable trader, especially if they were investing for a good return. Otherwise commodities trading was just as good as gambling, now however there are options for an average trader to invest in these markets, especially with the birth of the internet.
How to start investing on commodities markets
You have several different options open to you, depending on how much money and time you have to invest and your goals. The rules are different on how to start investing depending on which option you choose, so it’s important to take time to think about these before you jump in.
As discussed before, this is an agreement to buy a commodity for a specific price at a specific time.
In order to start trading on the futures market, you will have to open a brokerage account. This is a contract with a licensed brokerage business to look after and invest your money. While the money is with the brokers, it will remain owned by you and subject to any tax laws on capital gains in your jurisdiction.
Commodity trading requires a minimum deposit (which changes depending on the broker). The value of this account will then change depending on the value of the contract and if the value lowers to too little, the brokers will subject you to a margin call which means you must place more money into the account.
There are two situations in which this option is best: The first is you own a business that deals with a commodity and you want to hedge the markets in order to lower your losses if commodity prices were to change drastically. The second is you have large amounts of money to invest and want to take a large risk for a large reward very quickly by profiting off the change in a commodity’s price.
The majority of futures contracts also offer options, so that you can limit your losses to the price point of the option, the downside to this is that the brokerage firm will often charge a high fee for this and the price of the option doesn’t match equally with the price of the commodity.
Companies that produce, trade or work with commodities are often on the public stock market and will allow an investor to buy stocks. In this way, you can then trade on a commodity by buying stocks in a company working with that commodity. This is a very simple, quick and easy way to trade on the commodities markets as stock investment is the most accessible form of investment and it is possible to buy stocks for multiple commodities at once in order to lower your risk. Again, you will need a brokerage account to take part in trading on these markets.
Another upside to this form of investment is knowledge on the company’s finances are often publicly available, you can do research on a specific market and make much more informed decisions on your investments than futures contracts.
The downside to this form of trading is that because your stocks are tied to the company, rather than the commodity, business conditions will effect your investment, just as much, if not more than, market conditions and changes.