What are commodities? A beginner's guide to trading commodities

The commodities market is growing rapidly, and many are starting to look for alternative values to expand their investment portfolios. Today, we will understand Commodities—the products that are attracting investors worldwide—from basic commodities, their characteristics, to how to enter this market.

What are Commodities: Why are they important?

Commodities (commodities) are fundamental raw materials used in manufacturing or daily consumption, such as copper, wheat, coffee beans, crude oil, and gold. These items are vital because they form the foundation of the global economy.

Commodities are divided into two main categories based on their origin:

Soft Commodities - Products from agriculture or livestock, such as coffee beans, cocoa beans, oranges, and meats. They have limited shelf life and high volatility due to weather conditions.

Hard Commodities - Products obtained through mining or extraction, such as crude oil, natural gas, copper, silver, gold, platinum ###XPTUSD(, and palladium )XPDUSD(. These are natural resources that are finite.

Types of Commodities You Should Know

) Main categories of commodities

Agricultural Sector - Sugar, cotton, coffee beans

Livestock Sector - Pork, beef, general livestock

Energy Sector - Crude oil Brent (UKOIL), natural gas (NATGAS)

Precious Metals Group - Gold (XAUUSD), silver (XAGUSD), copper (COPPER), platinum ###XPTUSD(, palladium )XPDUSD###

In the global financial markets, the most traded commodities are coffee, sugar, gold, copper, oil, and natural gas.

What are the main factors driving commodity prices?

( 1. Demand Factors )Demand Factors###

Rising income and population increase demand for commodities. Low-income countries often spend most of their income on food, while wealthy countries increase consumption of meats and luxury products. These consumption behaviors create shifts in price structures.

( 2. Supply Factors )Supply Factors###

Production factors—labor, land, water sources, research and development investments—all influence supply. After the 2008 crisis, investment in production decreased significantly.

3. Uncertainties and Events ###Uncertainties###

Severe weather, natural disasters, and climate change limit supply, causing prices to spike rapidly.

4. Investment Cycles and Speculation

When prices rise, more traders enter the market, pushing prices even higher. This cycle increases volatility.

Why invest in Commodities? Interesting benefits

Hedge Against Inflation

Gold, silver, and oil tend to increase in value during high inflation, making them a way to protect your capital.

Diversify Your Portfolio

Commodities have low correlation with stocks and bonds, helping to balance your portfolio and reduce market downturn impacts.

High Return Opportunities

During uncertain economic times, commodity prices can rise quickly due to supply-demand imbalances.

High Liquidity

The commodities market is large and allows easy opening and closing of positions, unlike holding physical goods.

Long-term Growth Potential

Demand for certain commodities continues to grow while resources diminish.

Disadvantages and Risks to Understand

High Volatility

Commodities are about twice as volatile as stocks and four times as volatile as bonds. Prices can change rapidly, complicating investment decisions.

( Leverage Risks

Many traders use high leverage. If prices move against predictions, you can lose your entire investment quickly.

) Market Decoupling from Stocks

Commodities often move inversely to stocks, meaning when stocks fall, commodities may rise.

Environmental Impact

Mining, harvesting, and oil extraction have significant environmental consequences.

4 Ways for Beginners to Trade Commodities

( Method 1: Commodity ETFs

ETFs allow you to invest without owning physical commodities, mainly through derivatives or futures.

Advantages:

• Start with a small investment )around 1 unit###
• Easy to buy and sell online
• No worries about storage or additional costs

Method 2: Commodity Futures

Futures are forward contracts to buy or sell at a set price today, with delivery scheduled in the future.

Advantages:

• Profit in both rising and falling markets
• Require less capital (via margin)
• Suitable for traders with limited funds

( Method 3: Stocks of Commodity Companies

Invest in shares of companies involved in production or trading of raw materials, such as BHP, Rio Tinto, Vale SA.

Advantages:

• Diversify risk
• Hedge against inflation
• Easy to follow company news and data

) Method 4: CFD Trading on Commodities

CFD (Contract for Difference) allows online trading through brokers without physical delivery.

Advantages:

• Profit from both upward and downward markets (sell instantly)
• Use leverage; small capital but potentially high returns
• Market open 24/5, tradable anytime
• Access various markets, not limited to commodities

Hidden costs: Not just profit or loss

When trading commodities, your profit isn’t just the difference between opening and closing prices. You must subtract trading costs:

1. Spread (spread) - The difference between buy and sell prices, e.g., gold buy at 1949.02, sell at 1949.47, spread = 0.45. To make a profit, price must move beyond this spread.

2. Swap (rollover fee) - Fee for holding positions overnight, charged at 23:59.

3. Commissions - Some instruments charge a fee for opening and closing trades.

Accurate profit calculation requires deducting all these costs.

Trading hours for commodities traders to know

Commodities are not traded 24/7 but depend on the product type. Example trading hours (Thailand time):

Gold (XAUUSD): Mon 06:00-05:00 | Tue-Fri 00:00-24:00 | Sat 06:00-05:00

Silver (XAGUSD): Mon 06:00-05:00 | Tue-Fri 00:00-24:00 | Sat 06:00-05:00

Copper (COPPER): Mon 08:00-02:00 | Tue-Fri 00:00-24:00 | Sat 08:00-02:00

WTI Oil (USOIL): Mon 06:00-05:00 | Tue-Fri 00:00-24:00 | Sat 08:00-05:00

Natural Gas (NATGAS): Mon 06:00-05:00 | Tue-Fri 00:00-24:00 | Sat 06:00-05:00

Coffee COFFEE: Mon 16:15-01:30 | Tue-Fri 00:00-24:00 | Sat 16:15-01:30

Sugar SUGAR: Mon 15:30-01:00 | Tue-Fri 00:00-24:00 | Sat 15:30-01:00

Summary: How to start with Commodities?

Commodities are a vital part of a balanced investment portfolio. Whether you choose ETFs, Futures, CFDs, or stocks of companies, key tips are:

1. Choose a suitable broker - Must offer diverse markets, low fees, quick deposits and withdrawals.

2. Diversify risk - Don’t invest solely in commodities; mix with stocks and bonds.

3. Educate yourself - Understand the factors affecting prices, global events, and economic conditions.

4. Start small and use demo accounts - Many platforms offer free demo accounts with virtual $50,000 to practice without risk.

5. Control leverage - Small capital doesn’t mean high leverage is necessary; high leverage increases risk.

Investing in commodities can yield high returns but requires understanding the risks. Study thoroughly, and gradually increase your investment as confidence grows.