Why Should You Trade the Commodity Market? A Beginner’s Guide to Commodities

During times of economic volatility, many investors turn to new diversification strategies, and the **commodity market** becomes an attractive option because commodities not only help hedge against inflation but also offer profit opportunities from rising or falling markets.

### What is the Commodity Market and How Does It Differ from Traditional Investments?

**Commodities** are basic raw materials used to produce other goods or consumed directly, such as gold, crude oil, wheat, coffee beans, copper, and silver. These assets have unique characteristics that distinguish them from stocks or bonds: commodities tend to have more stable intrinsic value and often increase in long-term demand.

### How Many Types of Commodities Are There?

The commodities market can be divided into two main groups:

**Soft Commodities (Softs)**
Products from agriculture and livestock, such as coffee beans, cocoa beans, sugar, and pork. These are perishable and highly volatile due to weather conditions and natural factors beyond control.

**Hard Commodities (Hards)**
Resources extracted or mined from nature, such as crude oil, natural gas, gold, silver, copper, and platinum. These are finite resources, so increased demand with decreased supply typically drives prices higher.

Beyond classification by nature, commodities are also categorized by sector:
- **Agricultural Sector**: wheat, rice, cotton, coffee
- **Livestock Sector**: pork, cattle, and other livestock
- **Energy Sector**: oil and natural gas
- **Precious Metals**: gold, silver, platinum, palladium

## What Factors Determine Prices in the Commodity Market?

Commodity prices are influenced not just by a single factor but by the imbalance between (Supply) and (Demand):

**Demand Factors**
As income levels rise, demand for commodities increases, especially in low- to middle-income countries where most spending goes toward consumables like food and oil. Consumption patterns also influence prices; as countries develop, their populations tend to consume more meat and animal products.

**Supply Factors**
Depend on the availability of production inputs such as labor, capital, land, water sources, and natural resources. Production efficiency and management also play crucial roles. Reduced investment in R&D can lead to decreased supply.

**Uncertainty and External Factors**
Climate change, natural disasters, or crises can suddenly reduce supply, causing rapid price surges.

## Advantages of Investing in the Commodity Market

**Hedge Against Inflation**
As living costs rise, prices of commodities like gold, silver, and oil tend to increase, helping to preserve investment value.

**Portfolio Diversification**
Commodities have low correlation with stocks and bonds. When stock markets decline, commodity prices often remain stable or rise, reducing overall portfolio volatility.

**Liquidity**
Easily tradable through online platforms without concerns about storage or transportation.

**High Return Potential**
During economic downturns, commodity prices can increase sharply due to supply-demand imbalances.

## Disadvantages to Consider

**High Volatility**
Commodities are about twice as volatile as stocks and four times more than bonds. Prices of crude oil and gold can fluctuate dramatically within hours, which may lead to poor decisions by inexperienced traders.

**Leverage Risks**
Trading commodities often involves high leverage, which can amplify gains but also losses. Miscalculations can result in losing your entire investment.

**Environmental Impact**
Extraction and production of some commodities can have long-term environmental consequences.

**Market Opposites**
Commodity prices often move inversely to stock markets.

## How to Trade Commodities as a Beginner

Beginners don’t need to hold physical commodities; today, there are four main ways to trade:

### 1. Commodity ETFs
Buy units that track commodity prices directly. The advantages include low investment thresholds, no need to worry about storage, good liquidity, and ease of trading.

### 2. Commodity Futures
Invest in derivative contracts agreed upon today for delivery in the future. Benefits include profit from price increases or decreases and the use of margin, making it suitable for small capital.

( 3. Commodity Company Stocks
Invest in shares of companies involved in commodity production or trading, such as mining, energy, or agriculture firms. This diversifies risk and is suitable for long-term investors.

) 4. Commodity CFDs
Trade Contracts for Difference without owning the physical commodity. Advantages include:
- Profit from both rising and falling markets ###buy or sell###
- Use of leverage to control larger positions
- 24/5 trading hours
- Access to a variety of assets beyond commodities

## Costs to Consider When Trading Commodities

When calculating profits, investors must account for various costs deducted from gross profit:

**1. Spread (Spread)**
The difference between bid and ask prices. For example, gold bid at 1949.02 and ask at 1949.47 results in a spread of 0.45. Lower spreads are more cost-effective.

**2. Swap (Overnight Fees)**
For positions held overnight, a fee is charged at 23:59.

**3. Commissions**
Some instruments charge a commission for opening and closing trades.

Therefore, real profit = (Closing Price - Opening Price) - Spread - Swap - Commission

## Commodity Market Trading Schedule

Not all times are available for trading commodities. Each type has specific trading hours based on Greenwich Mean Time (GMT):

**Precious Metals** (Gold, Silver, Platinum, Palladium)
- Open: Monday-Friday 06:00, Close: 05:00 next day

**Oil** (WTI and Brent)
- Open: Monday 06:00, Close: Tuesday 05:00
- Open: Tuesday-Friday 00:00, Close: 24:00

**Natural Gas**
- Open: Monday-Friday 06:00, Close: next day 05:00

**Industrial Metals** (Copper, Aluminum)
- Open: Monday-Friday 08:00, Close: next day 02:00

**Agricultural Commodities** (Coffee, Sugar)
- Open: Monday-Friday 16:15, Close: next day 01:30 (Coffee)
- Open: Monday-Friday 15:30, Close: next day 01:00 (Sugar)

## Summary: What Is the Commodity Market and Should You Trade It?

**Commodities** are assets that help diversify your investment portfolio, have the potential to generate good returns, and can hedge against inflation or be traded via leveraged CFDs for higher profits.

However, key points include:
- Do not invest solely in commodities; diversify across asset classes
- Understand the factors influencing prices
- Choose reputable brokers with low spreads and low commissions
- Start small and increase gradually as you gain experience
- Manage risk with Stop Loss orders

Commodities are not suitable for everyone, but if you understand the risks and seek diversification, the **commodity market** can be a valuable addition. Do further research and start with a small amount!