There is a whole range of different commodities that can be traded in the financial world. Most of the private investors and retail traders tend to stick to only one or two markets when it comes to commodities. Prices of commodities going up or down affects our day-to-day activities. To put things in perspective, Anyone who drives a car would be impacted by rising crude oil price or a weather prediction of under average rainfall affects the crop production and in turn, the price of our next meal. A commodity market facilitates trading in various such commodities.
Commodities in the market are largely divided into three groups. Metals, Agricultural produce, and Energy. The metal is further classified into non-precious metals, like, iron, steel, aluminum, copper, and Precious metals such as Gold, Silver, Platinum, and Palladium. Agricultural produce is called Soft Commodities As the name suggests, it includes coffee, cocoa, wheat, corn, and so on.
The futures market is the most direct and popular way to participate in commodity trading. On the other hand, you may participate in commodity trading indirectly by buying or selling equities that are tied to commodities in some manner. In this article, we will further analyze what commodities are, how they are traded, and what is the major difference between Commodities VS Forex market.
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What are Commodities and How Does it Work?
As we have already mentioned, there usually are plenty of commodities but in the markets, they are generally broken down into several types. The first type is Metals. Metals include non-precious metals, LEDs, copper, nickel, and aluminum. It should be noted that those metals are commonly used by manufacturers and so on. So there is a market for trading large quantities of those non-precious metals.
Another type of commodity includes precious metals. Precious metals can be broken down not by what you think is valuable but actually by the market jargon and convention.
So the precious metals are Gold, Silver, Platinum, and Palladium. Metals are also known quite often as hard commodities for obvious reasons. Actually, in London, there is an exchange that specializes largely in trading some of these metals.
Another commodities type is agricultural commodities and a lot of people would call them ”Softs”. There is a big market for buying and selling the likes of cocoa, sugar, coffee, and so on. Those are agricultural or soft commodities.
While talking about how commodity trading works it should be mentioned that there is also another type of commodity which is Energy. This category includes oil, gas, and so on. The important thing is that there are not prescriptive definitions of commodities but these labels are used quite often to describe groups of particular commodities and each of them has slightly different and different markets in terms of where they are traded and obviously slightly different users in terms of buyers and sellers.
Before you dive into commodities you certainly need to know a little bit about what makes a commodity different. The major thing that you should probably know is that buying and selling commodities is not the same as buying and selling shares, bonds, or currencies.
There are some of the key sorts of features we need to look out for in the commodities markets. Those features explain in a nutshell why the commodities market is quite a high-risk place. Prices can be volatile and this is because of the mixture with commodities. There are a lot of different components that affect the prices of different commodities.
Most Traded Commodities in The World
Before explaining Commodities vs Forex which is better, it should be noted that one of the most traded commodities is considered to be Crude Oil. It is hardly unexpected given the high level of global demand and the extent at which our energy usage in our quickly developing and industrializing economy is spinning out of control.
There will always be a compelling need for energy and fuel sources. Another commodity that should be mentioned here is Coffee.
With over 2.25 billion cups of coffee drunk globally every day, coffee is considered to be the world’s second most traded commodity, trailing only crude oil—and also one of the oldest ones too.
The third most popular commodity throughout the world is Natural Gas.
Natural gas is without a question one of the most heavily traded commodities in the world since it is a source of energy and fuel utilized for nearly everything, despite increased attempts to shift toward renewable energy sources.
On top of that, it should also be stated that throughout history, gold has been regarded as a precious and valuable metal, particularly among investors, owing to its constantly growing value in recent years. Another commodity that should be considered after Gold is Silver. Historically, silver has been a secure investment as well as a source of stability in investment portfolios. It is utilized in high precision medical equipment and industrial operations, in addition to its visual beauty.
How are Commodities Traded?
In order to analyze commodities vs Forex which is more profitable, there are some things that should be taken into consideration. First of all, commodity trading is one of the oldest forms of activity, yet it is also one of the most widely misunderstood. Commodity trading or investing involves more specialized expertise and may involve more risk than more well-known assets, but it also provides investors with unique chances to trade and gain from shifting prices. As we have already mentioned earlier, there are three types of commodities including Metals, Agricultural produce, and Energy.
In reality, very few traders appear to be equally capable of trading all commodities markets. As a result, you must carve out your own niche and dominate a particular market. Get acquainted with and understand the intricacies of your niche commodity since this is the first step in developing a successful commodities trading strategy. Finding your market is just a question of determining the market you are most comfortable trading in.
It should also be emphasized that commodities exhibit significant cyclical patterns. Besides, Commodity prices are determined by the supply and demand law. The combination of supply and demand can result in the creation of both bullish and bearish trends. In general, continuous times of strong demand or limited supply control a market, driving prices upwards, whereas prolonged periods of oversupply or lack of demand bring prices downwards. As a result, the values of commodities fluctuate significantly above or below their long-term price trend over lengthy periods of time. While talking about how commodity trading works, another noticeable thing is that if you wish to start trading commodities, it is recommended that you first use fundamental analysis to forecast future prices. Technical analysis alone is insufficient for commodities trading. You must begin utilizing fundamental analysis in order to forecast future pricing.
Fundamental analysis examines economic variables that may impact the price of various commodities, especially in relation to supply and demand. This might imply focusing on such important factors as Macroeconomic statistics, such as GDP, unemployment, and retail sales patterns. As a result, if you are a newbie, you should employ a long-term approach based on fundamental and technical research to anticipate commodities prices. Look for emerging patterns that will result in a shift in supply and demand variables. Longer-term commodity patterns are simpler to identify with fundamental analysis, and technical analysis may be used to identify shorter-term price changes in commodities.
Commodities Compared to Forex
A lot of traders wonder about commodities vs Forex which is better and which one is more profitable. There are several important things to consider while comparing the two financial markets with each other. First of all, it is important to state that both have their own pros and cons that every investor should take into account. For example, in the commodity markets, there are large amounts of commodities available to trade.
On the other hand, when it comes to trading in the foreign exchange market, there are only a small amount of currency pairs to watch. However, in the Forex market, there are no short-selling restrictions while in the Commodity market, sometimes there are restrictions when it comes to trading.
Overall, the important thing is that there are several factors that differentiate these two markets from each other. Those crucial factors include Risk factors, research time, needed knowledge, liquidity, and margin rates. We will talk about these factors and analyze them briefly down below.
Risk Factor- Commodities
While we analyze trading commodities vs Forex one of the most important features that should be definitely highlighted is the risk factors related to them. The thing is that both Forex and Futures markets are considered to have quite a high risk. This is mainly because of one reason – Leverage. This trading tool is actively used in both of these financial markets, however, there still are some differences among them.
When it comes to trading with commodities in the futures market the leverage ratio ranges from 1:10 to 1:30 or more. This means that for example, an investor will have to only deposit roughly $5000 to get ownership of $80,000 worth of crude oil.
Even though trading with this type of position still includes risks, it should be noted that compared to the foreign exchange market, this is not a high level of risk while trading.
This is mainly because the Forex market has way higher leverage ratios. The average leverage level in this financial market ranges from 1:100 to 1:300 which is, compared to the Futures market, way riskier business to do. The reason the leverage is higher in this market is that without this trading tool, gaining a substantial amount of income would be almost impossible while trading in the Forex market. This is why it is generally considered that trading in the foreign exchange market with the currency pairs is one of the riskiest yet the most profitable trading opportunities there is in this type of industry around the world.
Research Time/Needed Knowledge – Commodities
While we explain commodities vs Forex which is more profitable another important factor that should also be considered is research time and needed knowledge about the markets. We all know that in order to reach success in any type of financial market, it is necessary to find out everything related to the latter, gain important information, and research every type of detail, trading tool, strategy, and concept to have a better understanding of what it is and how it works generally.
When it comes to the overall time and effort, it can be said that the Foreign exchange market is way complex and puzzling as it needs way more time in order to analyze the full market. On the other hand, trading with commodities requires just the knowledge of the overall options there are in the market and how to buy and sell them. It is quite a simple process and even beginner traders are able to trade with this type of asset without any further experience under their belts.
However, this is not the case in terms of Forex trading. We all know that there are a lot more things to know and a lot of concepts to be remembered, such as leverage, pips, spread, trading accounts, platforms, strategies, and so on. All of these are equally important and play a significant role in every trading. So one has to fully understand all these trading tools before they decide to start trading in the foreign exchange market.
Liquidity – Forex
Analyzing Commodities vs Forex which better, another important concept that should be noted is liquidity. The ease with which a commodity may be bought or traded in the market at a price that reflects its true worth is referred to as liquidity.
Currency is sometimes regarded as the most liquid asset since it may also be exchanged for other commodities in the shortest and most efficient manner.
Liquidity is an important concept when working with various types of stocks. The higher the amount of liquidity, the greater and more advantageous it is for every trader since it helps them to buy and sell assets more easily and quickly.
When it comes to liquidity, the Forex market is always the obvious winner. This is because of the simple reason – currencies are always the assets without any competitors in the market in terms of their high liquidity characteristics.
Currencies are always the easiest financial products that can be brought or sold in any type of market. On the other hand, commodities also have a good level of liquidity but it does not mean that there will always be a demand for them in the market.
Margin Rates – Forex
While we have commodities compared to Forex another noticeable thing that should also be highlighted is Margin Rates. As we have already mentioned, margin rates and leverage, in general, is a very important aspect of trading in the financial markets. It helps most of the traders to gain a substantial amount of profit by just depositing a small amount of initial capital. In most cases, the higher the margin rates, the higher the possibility of gaining a big amount of payout but there is also a higher chance of losing all of the money invested.
Therefore, the risks are usually associated with this trading tool. In terms of the leverage ratio, the Foreign exchange market is a true winner at this point. There are always higher ratios in this financial market compared to commodities trading. The primary benefit of using a high leverage ratio in the foreign exchange market is that it allows most investors to spend their money much more efficiently and achieve the highest return that they would not be able to obtain otherwise.
Final Words on Commodities
There are normally many commodities, but in the markets, they are frequently classified into various sorts. Metals, agricultural products, and energy are all examples of commodities. The futures market is the most direct and popular means to trade commodities.
Crude oil is regarded as one of the most traded commodities. It is hardly surprising, considering the high level of global demand and the extent to which our rapidly increasing and industrializing economy’s energy consumption is spiraling out of control. Energy and fuel sources will always be in high demand. Commodity trade is one of the oldest types of business, but it is also one of the most misunderstood. Commodity trading or investment requires more specialized knowledge and may involve greater risk than trading or investing in more well-known assets, but it also gives investors with unique opportunities to trade and profit from changing prices. If you want to start trading commodities, it is best to start with fundamental research to estimate future prices. Commodity trading requires more than just technical analysis.
There are various elements that distinguish these two marketplaces from one another. These critical aspects include the risk factor, research time, expertise required, liquidity, and margin rates. All of these factors should be taken into account by every trader before they make a final decision on which market to invest in.
