Commodity refers to the basic good that can be interchangeable with the other commodities of similar type. Commodities trading is one of the most ancient practices in the history. The trading of rice in ancient China and the oil and rubber during World War are some of the examples.
Commodity trading has a huge economic impact on nations as well people. Though some are aware about commodities trading, many people did not know the exact concept and benefits of commodities trading.
Trading of commodities generally lies in four categories: Energy, metals, agricultural and livestock and meat. Energy category includes crude oil, natural gas, gasoline etc. Gold, silver, copper and platinum lie under metals category. Livestock and meat consists of live cattle and feeder cattle. Rice, wheat, soybeans, cocoa, corn, coffee, sugar and cotton fall under agricultural category. In India, many people use metal commodities trading mainly with gold and silver.
Commodities can be traded on spot as well as futures. The most common practices available with commodities trading are futures, forward contracts and hedging options. Commodities trading is very risky as they are more prone to be volatile to natural disasters, weather related changes and other factors that can affect their prices. Generally it is difficult to predict their volatility. Analysts recommend not investing more than 10% of allocated resources in commodities from their total investment.
Many investors do not understand the commodities trading market like equity market and they treat it as an unfavorable one. But with appropriate observation of market and understanding the demand and supply in the market, one can gain in futures trading of commodities. It is considered that the commodities of futures are less volatile than those of equity and bonds. Furthermore, they can make an efficient diversified portfolio. Hence, investors should recognize the risks and rewards before investing the commodities of futures or seek the advice of experts.