Commodities markets are simply where raw or primary products are exchanged. They are traded on regulated commodities exchanges in which they are bought or sold in standardised contracts. In more recent years it is also possible to spread bet on the price of these commodities which negates Capital Gains Tax, the handling of the physical commodity itself and the associated costs of transportation and storage. Commodities that are traded or used for spread betting generally fall into one of three categories:
- Food – Corn, Wheat, Soybean, Sugar, Oats, Cocoa
- Metals – Gold, Silver, Platinum, Copper, Palladium, Zinc
- Energy – Oil, Natural Gas, Propane
The exchange of commodities is the very foundation on which regional, national and international development was built upon and the construction of commodities markets has had an almost immeasurable impact on global economic growth. Initially used as a form of currency in early barter economies, professional traders and spread betters now utilise the commodities markets purely as a form of investment without ever having to take stock of the physical commodity itself. It is a market that has grown rapidly and one that will continue to do so with Oil and Gold proving to be the most widely traded commodities.
The volatility associated with commodities is a key reason why traders and spread betters alike find them such an appealing proposition. The volatility in their price movements opens up opportunities for huge profits – but also substantial losses if the market moves against you. The fluctuations in prices can leave less experienced traders in unenviable positions at the close of the trade, but for experienced traders who study the markets carefully the returns are potentially lucrative. When trading commodities you should always look to make use of the risk management tools provided by your choice of spread betting firm.
Trading commodities is, of course, an attractive method of investment but traders need to be aware that, as with any investment carrying opportunities for large returns, if you are not careful to familiarise yourself with the markets and know exactly what it is that you are doing then you could find yourself significantly worse off than when you opened the trade. Commodity prices can certainly remain static for long periods of time but it is not uncommon to see rather large movements in only a short period of time and so traders need to keep a close eye on the derivative markets to see where the weight of money is so they can have a strong indication of when to take their profits.