By eToro

The Definition of Commodity Trading

Commodity trading is an exciting and sophisticated type of investment.  While this type of trading has many similarities to stock trading, the biggest difference is the asset that is traded.  Commodity trading focuses on purchasing and trading commodities like gold rather than company shares as in stock trading.  Like stocks, commodities are traded on exchanges where investors work as a team to purchase or trade products in an attempt to generate profit from the fluctuation of market prices or because they need that particular product.


The Definition, Marketplace and Players of Commodity Trading


A commodity is either grown or produced naturally in the environment.  Some examples of commodities include platinum, gold, cotton, wheat, cattle, lumber, oil, orange juice, pork bellies and sugar.  Generally, the most traded commodities are oil, gold and silver and are included in both international and national marketplaces along with a variety of other commodities. The prices of these commodities are primarily based on their demand and supply.  Traditionally, large businesses have been the main participants in the commodities market.  However, there are many individuals investors who now have access to this market via the internet.  Large businesses and companies need commodities to operate – clothing manufacturers require cotton, supermarkets and restaurants need cattle and construction companies need lumber.  One of the largest commodity exchanges is the New York Mercantile Exchange (image below).



Individual Investors and Commodity Trading Methods


With the advent of the internet and online brokers, individual traders can now get involved in the commodities market.  These individual investors do not need these commodities as companies do.  Therefore, the reason that they trade commodities is to generate a profit.  Investors, just like companies or other investment institutions, are able to make a profit from the changes in commodity prices.  In order to make a profit from the commodities market, investors must purchase or trade the commodity at the correct time depending on the increase or decrease in price.  There are several methods that investors can use to trade commodities.  First, commodities can be traded in futures – these are contracts that direct the purchase or trade of a commodity at a certain price.  Commodities can also be traded with options – this means the commodity is purchased or traded at a particular date and price.