How to Trade Commodities
The main commodities markets are based in America and the UK. Commodities are traded on exchanges and involve the buying and selling of physical entities, such as crude oil, natural gas, gold, silver, coffee and wheat, to name but a few.
Continuously rising commodity prices can indicate what is known as a bubble or may be the result of fundamentally increasing values.
Buying a certain amount of a commodity or speculating on its price to rise through a derivative product, such as a Contract for Difference or a commodities spread bet , can lead to a profit if sold at the right time. The right time, in this context, means at a point when the price of the commodity is higher than when it was originally purchased.
Of course, if the market moves against your position, you may have to sell the commodity at a lower price, which will lead to you making a loss.
Understanding the difference between a bubble and fundamental value is essential if you are to minimise your risk. As the price of a commodity rises, it may look as though it will continue to do so for a long time.
In commodities, a bubble is the term used to denote a market in which prices are believed to be rising significantly higher than the supply and demand fundamentals suggest the actual price should be.
When a bubble bursts, prices plunge as traders suddenly attempt to sell their holdings, thereby flooding the market and depreciating prices further. Bear in mind that spread betting companies let you speculate on markets to fall.
Commodity prices often rise and fall in cycles. This means they can be traded in anticipation of market cycles. One possible strategy is to invest in commodities when the cycle is at a low point and to sell when it has risen to a high point.
However, it is of course very difficult to know at what point a cycle is at. Prices may fall further than you had anticipated or fail to rise to the extent that you predicted.
Diversification is a strategy used by traders to limit their risks. Instead of trading a single commodity, diversification means you are engaged in trading several different commodities. Although given that commodities are generally seen as riskier assets, diversification within an investment portfolio would normally include buying shares.
One aspect of commodities trading that is worth noting is the fact that commodities are not owned or sold by any one company.
It is important to understand that commodities may rise or fall in value over time, just as a company's shares can. The impetus behind price fluctuations may differ, but the act of attempting to correctly anticipate future price movements is still a difficult task.
Contracts for Difference and Financial Spread Betting are both financially margined types of investing, these products do involve high levels of risk to your trading capital. It is possible to incur losses which are greater than your original stake or investment. Only invest using funds you can afford to lose. Always make sure that you fully recognise the risk. Contracts for Difference trading and Spread Betting might not always be suited to all classes of investor so obtain impartial trading guidance when appropriate.
[removed]// <); // ]]>[removed]
About the Author:
Situated in the centre of London's financial district, Daniel Jones is a seasoned spread betting professional and commentator on some of the leading financial spread betting sites.