What Exactly Is a Commodity Trader?

Susan Kelly

Dec 27, 2023

For example, a commodity trader may be a person or a firm that invests in actual commodities such as oil or gold. Economic expectations or commodity market arbitrage possibilities typically drive daily buying and selling.

It is common for commodity markets to trade in enterprises that acquire natural resources for profit. Although physical trade and derivatives trading are also widespread, futures contracts account for most commodities trading. In addition to oil and gold, there are markets for cotton, wheat, corn, sugar, coffee, cattle, pork bellies, timber, silver, and other metals.

Commodity Traders: A Guide to Understanding

Commodities traders come in all shapes and sizes, shapes, and forms. These dealers often trade raw materials utilized at the beginning of the production chain. Copper is used in building, and grains are used as animal feed. Most of these people work for huge commodity producers like oil firms, mining companies, and the like, while some trade on major markets such as the New York Mercantile Exchange on their own.

Several factors secure the greatest possible pricing for an employee working for a manufacturer or company. Other commodity traders function purely as broker-dealers, such as Vitol and Trafigura. Brokerage businesses employ professional commodities traders who contribute to developing a thriving and liquid global commodities market.

How to Make Money in the Commodity Market

Commodity trading may be done in various methods, each with its own set of benefits and drawbacks.

Commodity Futures

Commodities are traded on futures exchanges in the most frequent method. You and another investor engage in a contract based on the price of a commodity in the future. If you commit to buying 10,000 barrels of oil at $45 per barrel over the next 30 days, you are entering into a futures contract for that commodity.

Ending the contract doesn't mean transferring products but rather adopting an opposing position in the spot trading market to close out your transaction. You'd execute another contract to sell 10,000 barrels of oil at the current market price when the futures contract's expiration date comes around.

Sales of Physical Commodities

You do not purchase or sell the actual commodity when you trade futures contracts. If you're a futures trader, you don't buy or sell anything—you gamble on the price of anything. The actual possession of gold or silver bars, coins, or jewelry is possible for investors in precious metals like these.

These investments allow you to feel the actual weight of your investments in gold, silver, and other precious metals. Despite this, the transaction costs for precious metals are greater than for other assets. Gold, silver, and platinum are the only valuable commodities that may benefit from this method."

Stocks of Commodities

Buy the shares of a firm that deals in a certain commodity. It's possible to invest in an oil refinery or drilling company's stock for oil or a huge agriculture company's stock for grain or seeds for sale. The price of the underlying commodity drives these types of stock investments.

If oil prices rise, an oil company's profits should increase, which would lead to an increase in its share price. By not only relying on the commodity's price, investing in commodity stocks has a lower risk than doing so directly in commodities. Even if the commodity's value drops, a well-run business can still generate money. This, however, has a reversal effect.

Commodity vs. stock trade

Leverage is significantly more widespread in commodities trading than in stock trading. There's no need to put down a large sum of money at the outset. Ten percent of an oil futures contract's value can be a better option than a whole $75,000 investment. The contract stipulates that you must maintain a minimum account balance equal to the anticipated value of the deal.

To avoid a margin call and return to the trade's needed minimum value, you will be obligated to deposit more funds if the market price begins to move in the other way. With leverage, "margin trading may lead to bigger profits than the stock market," adds Turner.

Commodity Trading's Negatives

Limitations of commodities trading in comparison to other markets As an example, commodities traders, for example, make their whole profit on the price of the commodity they are dealing with. Unlike stock or bond investors, commodity traders do not get dividends or interest payments from the assets they purchase. If the commodity trader wants to make money, they must be able to predict the commodity's price movement accurately to do so.

Investing In Commodities?

Sophisticated investors should consider commodity investment. Before placing trades, a thorough understanding of commodity price charts and other research is necessary. It's important to have a high level of risk tolerance since market price movements might result in substantial profits or losses.

Commodities should only make up a small amount of your overall portfolio if any at all. When diversifying a portfolio with a greater risk/reward profile, "many investors and traders utilize roughly 20% or less of their portfolio for higher risk/reward," Turner explains. This is where commodities trade takes place. "

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