How commodities trading works: future contracts, prices, investment

Commodity trading involves such raw materials as gold, oil, gas, and a lot of others. This market is an essential part of the world economy and affects every person regardless of whether they are interested in trading or not. For those who are affected, the commodity market offers high profits. We shall have a small look at how commodities trading works.

What are commodity futures?

An essential part of this trading field is the term “Commodity Futures.” These are agreements to purchase or sell any of the listed materials at a specific date in the future at a particular price. The signed contract is for a set amount.

There are three main spheres of commodities:

• Food (mostly meat, wheat, and sugar);
• Energy (primarily crude oil and gas);
• Metals (mainly gold, silver, and copper).

Fixed prices in future contracts reduce the risk of a loss for the buyer if the prices go up after the deal is made. A futures contract is used by sellers to guarantee that their products will be sold and that they will get the payment that was discussed.

How does commodities trading work?

Commodities trading reminds the way the stock market works. Imagine that a contract has been signed. If the price for the material grows, the buyer saves and even makes money. The reason is that he gets the products at a price that is lower than on the market and can sell it at once by the current market value.

There is no need for delivering products upon commodities trading. If it were so, nobody would do it. A documentary confirmation that the product is available in the warehouse is quite enough. By having it, you can freely buy or sell commodities straight without using brokerage services.

Pros

Let us have a look at the general advantages of this type of trading:

• The commodity producer can be sure that his production will be sold at a fixed price no matter what happens;
• When the market prices drop, the producer will not lose any money as the production will be sold at the agreed rate;
• Futures contracts allow both the buyer and seller to ensure the deal is conducted at a fixed price;
• Producers can make production plans far ahead based on such contracts.

As we see, both sides of the deal have advantages here.

Cons

Now let us have a look at the general disadvantages of this type of trading:

• If the prices grow, the producer losses potential profit;
• If the prices fall, the buyer loses money;
• The commodity market is very volatile thus meaning that it is hazardous;
• Although demand and supply remain on the same levels, the prices on the world markets depend on a lot of other factors such as world events, political affairs, news, etc.;
• If you want to invest in commodities, make sure you are a real expert and understand everything not to lose your funds.

As we can see, volatility is an issue not only in cryptocurrencies and stocks but in commodities as well. Make sure the possible losses are affordable before any deal.

How to invest in commodities?

So, you have made up your mind and want to start investing? Remember to check out all the available materials on commodities trading to be well prepared! On our website, you can find a lot of free educational materials that are related to all types of trading. You can also register in our trading school to be mentored by experts.

Here are the steps you need to complete to be able to start trading:

• Create an account for free on dowmarkets.com.
• Confirm your identity and make a deposit.
• Press the orange “Trade” button at the left top part of the screen.
• Select the “Commodities” section on the left side menu.
• Choose the material you want to trade with and open your first deal.

The platform is easy to use as the interface is very intuitive. There are a lot of strategies for earning money with commodities. If you want to choose the best options for you, contact your analyst to create your or check out the free educational materials.

How are prices affected in short

Traders and analysts spend a lot of time researching the field before they make a decision. To commodities, the future price is calculated to understand whether there is any sense in making a deal now. A lot of political affairs straightly impact the market value as well. Even the smallest news article about a threat of closing, for example, a mine, will have its impact.

It is also often that some traders especially raise the prices to earn more in a period of crisis. Others see that there is an interest in the field and put an even higher price. Demand and supply do not change. As only the crisis is over, the prices fall back to their previous values.

We hope this article was useful to you. If you have any other questions left, please contact your analyst on Dowmarkets.