Making Money from Commodities Trading

Commodities trading is an increasingly popular investment activity that ordinary people can participate in. This is because the growing number of online brokers has made it more accessible to individual investors who can trade from home. There are also many ways that investors can make money from the commodities markets without actually having to take possession of the underlying asset.

Best Brokers For Commodity Trading

BROKER

FEATURES

OVERALL RATING

24option Logotype
Minimum Deposit: €250
Regulated Broker
Mobile Trading
IQ option logo
€10 in Minimum Deposit
Regulated broker
Other trading products
24option Logotype

Minimum Deposit:
€ 250

Trading Options:
Forex, Cryptocurrencies, Stocks, Index, Commodities and CFD

What’s Commodities Trading?

A commodity is a basic good that is essentially uniform, regardless of the producer. While there may be small fluctuations in quality among different producers, a particular commodity is basically the same, no matter where it comes from. Its value is determined only by external market factors such as the supply and demand for the commodity and the amount of investment being put into it.

Commodities can be divided into four general categories:

  • Agricultural commodities including wheat, corn, sugar and cotton.
  • Precious metals such as gold, silver and platinum.
  • Energy including crude oil and gasoline
  • Livestock such as live and feeder cattle

There are several ways that you can invest in commodities. The most popular method is through futures contracts. These contracts give the holder the right to buy or sell a certain quantity of a particular product at a pre-determined price and a specified date in the future. Generally, these contracts are used by companies to ‘lock-in’ the price of a particular good that they need for their business if they are concerned that its price will rise in the near future. Producers may also use futures contracts to ensure that they get the price they want for their commodities if they are concerned about future price declines.

Speculators use futures contracts to invest in commodities without having to trade the actual physical good. They make their money by taking advantage of changes in the value of the contract that follow the fluctuating prices of the underlying asset. However, if you don’t exit your position by the time the contract expires, you will have to either deliver or take possession of the commodity represented by the contract.

In order to avoid this risk, most traders choose to invest in commodity options instead. These work the same as futures contracts, but only give the holder the right but not the obligation to buy or sell a particular commodity.

Commodities trading online is one of the safer ways to invest since options contracts lessen the risks of trading. When an options contract expires, the trader no longer has any obligations and his losses on the trade are minimal.

In addition, trading commodities is easier because analyzing the markets is less complicated. All you have to do is consider supply and demand factors. For instance, if you know that due to bad weather, less corn will be harvested this year, then the price will go up. Similarly, if the economy is booming, you can expect demand for metals to increase as well, causing prices to rise.

Is It the Right Time to Invest in Commodities?

The good thing about commodities as an investment asset is that they are a basic good that people will always need. While prices of particular commodities may fluctuate, they will never really lose their value. For example, there will always be demand for agricultural products such as corn and wheat, even if this goes up and down in response to market conditions.

This quality of commodities means that the value of stocks in related industries will also rise along with the price of commodities. For instance, as the price of oil on the market goes up, so will the value of stocks in companies involved in oil mining and refining. This means that there are many ways to invest in commodities rather than buying futures contracts, such as investing in exchange-traded funds that specialize in commodities companies.

This quality of commodities also makes it a good hedge against inflation. In times when there is high inflation, assets such as stocks and bonds tend to lose their real value. But since commodities are essential goods, they will not lose their value due to inflation and may even go up in price. In fact, many investors choose to place their money in commodities such as gold and other precious metals since they will hold their value over time.

It also does not take a lot of money to invest in commodities. As with trading other assets such as currencies, online brokers provide traders with leverage. This means that they can trade a contract with as little as 5% to 10% of its value in their trading account. Leverage also means that they can greatly increase their potential profits with a smaller investment.

Commodities are also safer since there is less volatility in prices, both in the long-term and on an intraday basis. This means that there is less risk that you will lose your investment when the commodity that you are exposed to suddenly falls in price.

It is easier than ever for traders to engage in commodities trading online since it is very easy to open an account with an online broker. Once you have an account, you can start trading simply by depositing money into your trading account. Many brokers have low initial deposit requirements so you don’t need a lot of money.

You can also avail of a demo account with a broker. These accounts let you make paper trades without risking your trading capital so that you can practice your skills until you are ready to trade with real money.

How to Start with Commodity Trading?

As we already discussed, the most common way for traders to invest in commodities is through futures contracts. But these are complicated and should only be undertaken by experienced traders. Fortunately, there are many other ways that you can make money from the commodities market, including:

Managed futures fund. This is a type of mutual fund that is managed by professional money managers. The funds are invested in futures contracts. They show returns comparable in the long-term to other asset classes, making them ideal for diversifying your investment portfolio.

Exchange-traded funds. These funds consist of shares of stock from multiple commodities trading firms. For instance, a gold ETF might be comprised of stocks from mining companies that produce gold. There are also ETFs that specialize in a single sector, i.e. agricultural products, or those that have futures from a variety of commodities.

ETFs allow investors to diversify their portfolios without actually having to invest in futures contracts. It even provides you with exposure to more unusual commodities such as soybeans and live cattle. The downside is that you will pay more in fees since you have to shoulder the costs of managing the fund, although these are shared among multiple investors. On the other hand, in the US, these funds have a lower tax burden in the US so the costs may even out.

Stocks. You can also indirectly invest in commodities by buying stock in companies that are engaged in the commodities business, such as mining companies. You can use them as part of an investment strategy in which you alternate stocks with commodity futures. For instance, when the prices of stocks go up, the value of commodities futures will go down. You can sell your stocks and make a profit, and then use the money to invest in futures. When the value of futures starts to go up, you can sell them and then buy stocks since their value has started to decline.

Contracts for Difference (CFDs). This is a financial instrument whose value reflects the price of the underlying asset. The trader opens a position based on which direction he thinks the price will move, and then takes a profit if he guesses correctly. You can trade CFDs using leverage, which means you only need to deposit a small fraction of the contract’s value in order to open a position. This greatly magnifies your potential profit relative to the actual amount that you are investing.

How to Choose the Best Broker for Commodity Trading

Binaly.com has done the hard work for you as far as choosing the safest online commodity brokers. You can be assured that all of the brokers that are listed on the site are reputable since we have researched them thoroughly. One of the most important things we have made sure of is that all the brokers on our site are licensed and registered with a reputable organization. This means that they are required to adhere to a code of standards that ensures that their operations are legal and in line with the best practices of the industry. These standards also ensure that the interests of their customers are protected, for instance by segregating their trading funds in an account that is separate from that of the broker’s.

But how do you find which particular broker is the best for you? Here are some tips:

  • Check out the history and reputation of the broker. Look at when the broker was founded and how long they have been in business. Obviously, just because a broker has been operating for a long time does not mean they are trustworthy, but it is a positive sign. You can also check what their online reputation is but you should also consider if the source is trustworthy.
  • What fees do they charge? Although this factor should not be the main one you should consider when choosing a broker, it is also something that you should not take lightly. Keep in mind that commissions can eat into your profits over time, so you should make sure that the broker’s fees are not too high.
  • What trading platform does the broker offer? The trading platform is your way of interacting with the broker so it is important that it is user-friendly and that it provides tools for helping you analyze the markets. Generally, most brokers offer the industry-standard MetaTrader platform or WebTrader, but some have their own proprietary platform. You should also consider if the broker offers demo accounts that you can use with the platform.
  • Does the broker offer mobile trading apps? This is important since it allows you to trade while on the go even if you are not in front of your computer. You can monitor your positions using your app, make any necessary adjustments and even open and close positions.
  • What trading accounts are available? What services are offered with each type of account and how much do you have to deposit to qualify for a particular account?
  • How can you make deposits and withdrawals from your account? What payment solutions/options does the broker use? What are the minimum and maximum amounts for making deposits and withdrawals?
  • What customer support does the broker offer? How can you get in touch with them if you have a question or an issue that you want to be resolved? Is live chat available? Is customer service available 24/7 or only during office hours? Try getting in touch with customer support and see how responsive they are and how knowledgeable the support agents are.

Why You Should Get Involved with Commodity Trading

Commodity trading is a potentially profitable investment activity that has many advantages over other assets such as stocks. These include:

More opportunities for growth. Commodities are basic goods that will never go out of style. In fact, many commodities will go up in value in the future as the demand for them grows. For instance, the continued growth of the Chinese economy is seen to boost the prices of commodities such as iron that are used in the construction industry.

A hedge against inflation. While inflation will affect the returns of your stock holdings, it will have the opposite effect on commodities. As the prices of goods go up, so will the values of the commodities that are used to produce them.

Diversification of your investment portfolio. If you are building a portfolio for a long-term savings goal such as retirement, investing in commodities can help diversify your holdings. Diversification is an investment strategy in which you have different assets that react differently to various market conditions. For instance, your portfolio can include stocks, bonds and commodities. Thus, if there is a downturn in the stock market, your commodity holdings will still hold their value.

You don’t need a large amount of trading capital. As we already pointed out, brokers provide their traders with leverage (borrowed money) so you only need a small percentage of the value of the contract to open a trade. This allows you to trade larger contracts and thus, potentially earn larger profits. Of course, the opposite is true since your risk of losses is larger in case the trade is unsuccessful.

It is easier to analyze commodities markets. With stocks, there is a lot of factors that can affect their values, not all of which are apparent to investors. This is why insider trading is a crime since certain individuals who have knowledge that can affect the values of stocks can take advantage and make money at the expense of other investors. On the other hand, the factors that can affect commodities prices are transparent, creating an even playing field for individual investors to make money as long as they use the right strategy.

Where and How to Invest in Commodities

As we already discussed, the most common way for traders to invest in commodities is through futures contracts. But these are complicated and should only be undertaken by experienced traders. Fortunately, there are many other ways that you can make money from the commodities market, including:

Managed futures fund. This is a type of mutual fund that is managed by professional money managers. The funds are invested in futures contracts. They show returns comparable in the long-term to other asset classes, making them ideal for diversifying your investment portfolio.

Exchange-traded funds. These funds consist of shares of stock from multiple commodities trading firms. For instance, a gold ETF might be comprised of stocks from mining companies that produce gold. There are also ETFs that specialize in a single sector, i.e. agricultural products, or those that have futures from a variety of commodities.

ETFs allow investors to diversify their portfolios without actually having to invest in futures contracts. It even provides you with exposure to more unusual commodities such as soybeans and live cattle. The downside is that you will pay more in fees since you have to shoulder the costs of managing the fund, although these are shared among multiple investors. On the other hand, in the US, these funds have a lower tax burden in the US so the costs may even out.

Stocks. You can also indirectly invest in commodities by buying stock in companies that are engaged in the commodities business, such as mining companies. You can use them as part of an investment strategy in which you alternate stocks with commodity futures. For instance, when the prices of stocks go up, the value of commodities futures will go down. You can sell your stocks and make a profit, and then use the money to invest in futures. When the value of futures starts to go up, you can sell them and then buy stocks since their value has started to decline.

Contracts for Difference (CFDs). This is a financial instrument whose value reflects the price of the underlying asset. The trader opens a position based on which direction he thinks the price will move, and then takes a profit if he guesses correctly. You can trade CFDs using leverage, which means you only need to deposit a small fraction of the contract’s value in order to open a position. This greatly magnifies your potential profit relative to the actual amount that you are investing.