KEY CONCEPTS. Understanding Commodities

Transcription

1 KEY CONCEPTS Understanding Commodities

2 TABLE OF CONTENTS WHAT ARE COMMODITIES?... 3 HOW COMMODITIES ARE TRADED... 3 THE BENEFITS OF COMMODITY TRADING...5 WHO TRADES COMMODITIES?...6 TERMINOLOGY... 7

3 UNDERSTANDING COMMODITIES WHAT ARE COMMODITIES? Commodities are vital components to modern economics and play a crucial role in our everyday lives. They are natural resources that are generally classified as either soft or hard commodities. Soft commodities are typically agricultural, like wheat and coffee, whereas hard commodities are metals or energies, such as gold and oil. All commodities can be traded as part of a diversified investment portfolio either in spot (realtime) or futures (options) markets. The production and consumption of commodities are influenced by a number of volatile factors that include supply and demand, weather conditions, the economy, political events and the US dollar (commodities are generally priced in USD). SOFT COMMODITIES HARD COMMODITIES HOW COMMODITIES ARE TRADED Commodities are mainly traded as futures contracts, which are agreements to trade an asset at an agreed price and date in the future. This enables you to trade the contracts themselves without needing to own the underlying asset. Commodities are traded on a number of exchanges that specialize in various markets including: LIFFE agricultural products ICE Futures US agricultural products Chicago Board of Trade agricultural products London Metal Exchange non-precious metals Chicago Mercantile Exchange energy and metals ICE Futures Exchange energy Copyright Icon Markets Limited

4 Futures contracts enable two parties to exchange the difference in value of a commodity at a specified future date, for a price that is agreed on in the present. Traders typically use commodity futures to speculate on the price movement of the underlying asset. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. in the price of a commodity from the time the position is opened to the time it is closed. The benefit of this method is that you can trade no matter the direction you believe the underlying asset will move. Traders also have the option to trade commodities as binaries and Contracts For Difference (CFDs). Individuals trading commodity CFDs agree to exchange the difference Commodity prices fluctuate widely, which makes price movements volatile. 4

5 UNDERSTANDING COMMODITIES THE BENEFITS OF COMMODITY TRADING There are numerous advantages to commodities trading, which include: ü Leverage While commodities carry measurable risk as with any other investment, you can trade on leverage with very low margin. ü Range of markets More than a dozen commodity exchanges can be accessed all around the world, which is direct reflection of market globalization. ü More opportunity Commodities provide traders with new opportunities to diversify their investment portfolios beyond stocks, bonds and mutual funds. ACCESS THE MOST LIQUID COMMODITY MARKETS Energy Agriculture Metals Softs Heating Oil Wheat Gold NY Cocoa Gasoline US Corn Palladium NY Sugar no.11 UK Gas Oil Soybeans Platinum NY Coffee US Crude Live Cattle US Copper UK Crude Silver US Natural Gas Copyright Icon Markets Limited

6 WHO TRADES COMMODITIES? SPECULATORS Investors with strong opinions about a particular commodity can speculate on the future price movement of the underlying asset. HEDGERS Investors will often buy and sell commodities as part of their risk management portfolio. Commodities provide a hedge against downward trends in other securities, as they tend to move in the opposite direction. BROKERS Many firms will carry out commodity trade requests, whether a buy or a sell, on the behalf of their clients. PRODUCERS Those who grow or harvest commodities often enter into futures contracts to diffuse the risk of future price fluctuations. SPECULATORS PRODUCERS BROKERS HEDGERS 6

7 UNDERSTANDING COMMODITIES TERMINOLOGY SOFT COMMODITIES Soft commodities are typically agricultural products, as opposed to resources that are mined or extracted. Examples include coffee, corn, sugar, wheat, rice and cocoa beans. HARD COMMODITIES These commodities are typically mined from the ground and include oil, natural gas, silver, gold, platinum, aluminum and copper. Because hard commodities are easier to handle than softs, and can be integrated into industrial operations fairly simply, they are the popular choice for investors. LEVERAGE Futures are traded on margin, which means traders only need to invest a nominal amount in order to place trades. LIQUIDITY Because large numbers of speculators are willing to take on the opposite side of a trade, futures contracts are usually very liquid. SPOT MARKET When buyers pay the commodity s producer for immediate delivery of the physical product, it is known as buying on the spot. The spot price is the currently listed market price. COMMODITY PRICE INDEX A commodity price index is a weighted average of commodity prices, grouped to represent a broad class of an asset. Commodity indices include: The Continuous Commodity Index (CCI) The Merrill Lynch Commodity Index (MLCX) The S&P GSCI (formerly the Goldman Sachs Commodity Index) Live Binary Prices Markets Sell Buy Change Updated Brent Crude :10:55 Spot Gold :26:01 Spot Silver :26:01 Aluminum :59:29 Copper :59:29 Copyright Icon Markets Limited

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