Commodity trading: what is a commodity trader
Commodity traders are believed to have been present as early as 4500 BCE in Sumer, the southernmost region of ancient Mesopotamia, around the region of modern day Iraq and Kuwait. However, the commodity markets around this time were drastically different to those today.
The Amsterdam Stock Exchange, often thought to be the world’s first stock exchange, was originally designed as a commodity exchange in 1530 CE. Nowadays, there are commodity exchanges in most major cities. Commodity markets are the oldest type of trading market in the world and have been through some major developments since their inception. However, they still provide an official place for commodity traders to gather. At these exchanges and markets commodity traders can buy and sell commodities between themselves.
This article explains what a commodity trader is and provides insight into the different types of commodity traders that exist. Following this, it contains a how-to guide to help you start commodity trading yourself.
What is a commodity trader?
A commodity trader is involved in the trading of commodities. Examples of assets that commodity traders deal with include popular raw materials such as precious metals, energies and agricultural products.
The daily trading efforts of commodity traders are often driven by a mix of fundamental and technical analysis. Traders stay up to date with the news on commodities to ensure they are aware of the macro-environmental forces that drive their prices, and then utilise technical analysis to make entry and exit trading decisions based on past trends.
Types of commodity traders
Commodity traders can be split into many categories, dependent on the asset that they trade. Some deal with hard commodities while others trade soft commodities; some traders prefer to focus specifically on the agricultural industry while others invest in gold to hedge their risk against stock market downturns.
Agricultural traders
An agricultural trader is a type of trader who deals with agricultural assets. Agricultural commodities are staple products and often provide a source of food for the global market. These include grains, livestock and dairy products. However, agricultural traders also get involved with the trading of non-food related agricultural commodities.
Agricultural trading is characterised by a dynamic market that is often influenced by a number of factors, including population growth, global demand, global warming and technology. However, the markets are generally expected to rise given the growing number of people and the rising wealth of consumers in growth markets.
Gold traders
Gold is the most popular asset among the precious metals. It is traditionally known as a safe investment and is often bought by governments, banks, hedge funds and traders. A gold trader can invest in the gold market for several reasons, one of them being to increase an investor’s balanced portfolio.
Many traders use gold to diversify their portfolio risk. They can achieve this by purchasing gold to hedge against stock market risks, such as global inflation or political instability. This is because unlike fiat currencies, gold often maintains its purchasing power in periods of prolonged inflation or market instability.
Read our full guide to gold trading here.
Oil traders
An oil trader is involved in the trading of various types of oil. The oil is named depending on where it is produced. WTI (West Texas Intermediate) oil is produced in the USA, whereas, Brent Crude Oil is produced in the North Sea.
Oil is one of the most popular commodities to trade as it is extremely liquid and heavily relied upon worldwide. The price of oil is not just influenced by supply from oil producing companies; it is also influenced by global demand, green initiatives, political situations and organisations such as OPEC (Organisation of Petroleum Exporting).
The commodity market explained
A commodity market refers to a market that offers the ability to buy and sell a select raw material, such as gold, coffee or oil. Commodity markets exist all around the world, and trades are often executed in commodity exchanges, which are present in all major cities.
Advantages of commodity markets
- Diversification: Commodities provide the opportunity to diversify your existing trading or investment portfolio. Trading in commodity markets can also provide a greater deal of diversification in comparison to other securities, as they often have a low or negative correlation when compared to other major asset classes.
- Inflation: Inflation can cause currencies to depreciate, which can lower the value of many financial assets such as stocks and bonds. However, commodities tend to hold their relative value during periods of high inflation, hence why many investors turn to precious metals such as the ‘safe haven’ of gold in uncertain times.
- Liquidity: The commodity market is generally known as a highly liquid market when compared to real estate or penny stocks. This is especially the case when popular commodities such as gold, oil or natural gas are in question.
- Volatility: Volatility in a commodity market can be perceived as both an advantage and a risk. It can be an advantage if you are able to predict when there will a jump in a commodity’s price, for example, if there is war in a major oil producing country such as Iraq. Smart investors can quickly realise the macro forces that could impact the specific commodity markets, and can capitalise on these forces.
Risks of commodity markets
- Value of commodities. Although rare, when trading commodities, you undergo the risk of a more efficient process or relevant product being invented that can largely devalue some commodity markets. An example of this was in the 1980s, when massive amounts of silver was consumed as part of silver-based imaging in photography films. However, due to the rise of digital cameras without the need for films, the demand for silver dropped for this use, causing the overall demand and thus the price of silver to fall.
- Demand. Demand within commodity markets presents a major risk for commodity traders. The value of gold, oil and other commodities are difficult to predict, and an incorrect speculation on your behalf can result in a losing trade.
- Volatility. A double-edged sword, volatile markets can present a commodity trader with great opportunities for both profit and loss.
Commodity trading accounts
At CMC Markets, we offer a variety of leveraged trading accounts that can be used to trade on commodity markets. You can open either a spread betting or CFD trading account. Both of which are similar in their function but have some unique features.
Spread betting commodities
Commodity traders can open a spread betting account to trade on price movements in commodity markets. Spread betting is a tax-efficient*method of trading as it’s free from capital gains tax and stamp duty. Please note that spread betting is only available to customers who reside in the UK or Ireland.
CFD trading commodities
CFD trading is available globally, so traders can speculate on commodity markets wherever they reside. When trading CFDs you have to pay capital gains tax, but trades are exempt from stamp duty. However, unlike spread betting when trading CFDs you can offset profits against losses for tax purposes.
How to trade commodities in Ireland
Commodity traders can take a position on commodity markets by opening a trading account with us. Here traders can access over 100 commodity markets and a specialised range of commodity indices. Follow our step-by-step guide on how to trade commodities for more information.
- Open a live spread betting or CFD trading account. With us you can open a live trading account to speculate on price movements of over 100 commodities and commodity indices.
- Research to find the right commodities for you. Use our news and insight tools and review our news and analysis section to inform your commodity trading efforts.
- Decide if you want to buy or sell. Determine your entry and exit points based on your trading strategy. Go long and ‘buy’ if you think the instrument price will rise, or go short and ‘sell’ if you think the price will fall.
- Control your risk. Before placing your trade, make sure you have followed risk-management guidelines as part of your strategy.
- Determine your position size and place the trade. Apply any risk-management orders, such as stop-loss and take-profit, and confirm your trade.
- Monitor your position and close your trade. Stick to your trading plan and close out your trade when the target price is reached.
Summary
Commodity markets offer a good opportunity to diversify your trading or investment portfolio. You can trade on commodity market price movements with a live trading account. However, for new traders, it is recommended to design an effective trading strategy in which to direct your commodity trading efforts. Once you have a coherent trading strategy, you can practise trading on a demo account in a risk-free environment with $10,000 of virtual funds.
Read our article on how to trade commodities for more information on how to succeed within commodity markets.
* Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
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