This is the buying and selling of raw materials such as gold or silver, as well as the exchange of assets such as futures contracts that are based on the price of the commodity they represent.

Commodities are most commonly traded by means of futures contracts. Under one such contract, you agree to purchase a commodity for a predetermined price at a future date. If you expect the commodity prices to go up, then you would want to buy futures now. If you expect the commodity’s value to go down, then you would want to sell the futures as soon as possible.

Types Of Commodity Trading

There are several different methods for beginning your commodity investment journey. The first is by purchasing futures contracts as mentioned above. In order to begin trading futures, you’ll have to set up an account with a commodities brokerage firm that offers this type of asset.

By choosing to invest in gold or silver, you also have the option of purchasing the physical asset itself. This means buying bullion gold or silver bars that you will physically store in a vault or safety deposit box. A bullion is gold or silver that is officially recognized as being at least 99.5% and 99.9% pure respectively.

Another option is to purchase commodity stocks, namely the stocks of a company that sells gold and silver. The price of such stocks will be greatly influenced by the price of the commodities themselves, meaning that you can enjoy the same profits that you would if you had chosen to invest in silver or gold directly. The main perk of investing in commodity stocks is that, if the company you invested in is well run, it could continue to make a profit even when the price of the commodity is on the decline.

You could also consider investing in a commodity ETF (exchange traded funds) or a mutual fund. These funds take money from a pool of investors and use it to build a portfolio of numerous commodities, futures contracts, and commodity stocks. Such portfolios are managed by professional investors who try to track the price of the basket of commodities and ensure that the portfolio is updated accordingly. What makes an ETF or mutual fund so appealing is that it diversifies risk, meaning that should one commodity’s price drop drastically, your other investments should help you to absorb the blow.

Should You Trade Commodities?

Commodities are a high risk, high reward form of trading. While you can certainly make a substantial profit if you play your cards right, you will need to develop a strong understanding of the commodities that take your interest in order to become a successful trader. Take some time to develop a strong understanding of your commodities of choice and make sure to study historical price charts. Even with sufficient knowledge, you could experience significant losses due to unpredictable phenomena such as extreme weather and political tension. For this reason, commodities should only form a portion of your investment or trading portfolio.

The Bottom Line

Now that you have a basic understanding of the world of commodity trading, it’s time to expand your knowledge. Consider conducting more online research or perhaps consult with a commodity trading advisor to ensure that trading commodities is the right path for you.

What Is Commodity Trading?