Commodity trading in the forex market involves investing in physical products called commodities such as gold, grains, and oil.
This type of trading only consists of investing in assets such as gold and oil and not a company’s shares as opposed to stock trading.
However, commodity traders trade the raw materials used in the production of finished goods such as grains and copper.
This set of traders ensure that products produced by manufacturing industries get to the consumers, thus providing the best price for producers.
Community traders get their profit when the volume of transactions is quite high.
Back in the days, commodity trading used to be an offline thing. But thanks to the advancement in technology, brokers can get their customers to trade commodities online.
There are different tools that give lots of information to brokers on any industry to ensure they trade at the right time.
Just like every other area in forex trading, investing in commodities has its pros and cons.
The Pros of Online Commodity Trading
Commodity trading can help diversify a portfolio. The profits gotten from commodity have decreased or negative correlations with the benefit obtained from different asset forms.
This means that if there is a decrease in bonds and stocks; definitely, commodities will increase.
Additionally, the factors that affect bonds and stocks don’t affect commodities.
It is essential also to know that commodities perform in diverse ways in different economic conditions: The value of stocks and bonds may decrease during a bad financial situation, but the worth of gold may rise due to the increase in its demand.
Therefore, commodity trading ensures a diversified portfolio and increases risk-adjusted returns.
- Safety Against Inflation
Inflation has a different effect on commodities than bonds and stocks. When inflation comes up, bonds and stocks decrease, but commodities still increase.
This is because when the price of goods increases, the value of commodities to produce these goods also moves up. With that in mind, inflation doesn’t affect commodity trading.
Commodity futures are highly liquid than investing in real estate and the likes. You can easily trade commodity futures at any time and liquidate your position.
The Cons of Online Commodity Trading
- Highly Volatile
Even though commodity futures are high in liquidity, they can be volatile too. It is essential to note that the futures market is unpredictable, and direct investments can pose a considerable risk, especially for inexperienced commodity traders.
- Speculative risk
Commodity trading also exposes a trader to uncertain risks. As a commodity trader, you aren’t always sure if you would make lots of profit or loss from an investment.
Hence, highly volatile commodities have a high speculative risk since any little change can determine profit and loss.
- Geographical risks
Because natural resources are found in different places worldwide ensures that traders would have to cope with governments with these resources.
To extract these natural resources in a given country, you have to obtain licenses, work with native companies, and deal with geographical and economic concerns.
Nevertheless, one thing every commodity trader has to know is that they also need to be aware of political decisions in that country, as it can change and affect their trades.
Additionally, the need to also keep tabs on the climate condition of the place is needful.
Online trading has an extensive list of advantages and disadvantages, well eclipsing the topics covered by this article. While the digital markets of today provide a wealth of opportunities, they also pose many unique risks. It is up to the individual to decide if the pros outweigh the cons and if online trading is an appropriate course of action given capital and risk considerations.
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