Commodity Trading

Being one of the oldest traded assets, commodities are also considered as the most naturally obtained assets and are often impacted by several climatic and weather changes, natural disasters, financial economic and political events amongst others.

Due to its natural characteristics, this asset is categorised in the primary sector which is the sector destined to raw materials. In other words, a commodity is defined as a tangible product which generates a demand. As a result, this asset is also intrinsically linked to the Law of demand and supply. That is, for example if the demand for wheat is higher than the current amount available on the market, the prices of this commodity will surge and vice et versa.

The origins of the commodity market

 


The roots of
commodities

The history of commodities dates back several years ago, more precisely 8500 years BC during an agricultural revolution. At that time, the commodities available were those obtained through agriculture by farmers, such as rice and wheat. In addition, the only form of trading practiced during these ancient times were between settlements.

However, as the commodity market and trading gradually evolved, farmers tried to find additional ways to protect the price of the products they cultivated. Besides, several factors such as bad climatic conditions and discrepancies between the amount supplied and the actual demand started to weigh on the market.


The evolution of
commodity trading

During the last century, assets obtained from agriculture were considered as the primary class of futures trading. Besides, in 1936 The Chicago Board of Trade (CBOT) decided to add soybeans to the list of tradeable commodities. In 1940 this list was further amended by the addition of cotton and lard. Progressively, livestock joined the closed circle of agricultural products in the 1950s. It was only during the 1960s that precious metals such as silver and copper stepped in.


Binary options
and commodity

The financial market made a big step forward with the advent of binary options in 2008. The interest in this market grew as it was now possible for producers and buyers to carry out transactions on the different commodities available anytime and anywhere with the help of online brokers. Nowadays, trading this asset consists of predicting whether the actual price of a commodity will rise or fall within a specific time period.

Types of commodities.

Since 1800, the commodity market underwent a lot of changes. Besides, due to the increasing amount of assets in this market, it has been segmented into two different categories: Soft commodities and Hard commodities.


Soft commodities

This segment englobes all the assets that are obtained through agriculture. That is, soft commodities represent the commodity market in its simplest form, like it was years ago. The assets in this particular market are principally affected by climatic conditions such as typhoons and cyclones.

Therefore, if there are drastic changes in the weather, the supply of soft commodities may be affected, thus affecting their prices.

Types of Soft commodities:
Agricultural: Corn, Wheat, Sugar, Rice, and coffee.


Hard commodities segment

This segment concerns assets which are obtained through mining and natural resources. Hard commodities are more popular than soft commodities due to their higher life value. Silver, gold and crude oil among others, are examples of hard commodities. Moreover, hard commodities are so popular as they are seen as essential for the economic stability of a country.

Hard commodities are affected by climatic conditions as well as financial changes too.

Types of Hard commodities:
Precious metals: Gold, Silver and Platinum.
Industrial metals: Aluminium, Copper and Zinc.
Energy: Gasoline, Crude oil and Propane.

Factors impacting commodities

As mentioned earlier, there are several factors which impact on commodities and this is why this asset is considered as one of the most volatile of the industry. Here is a list of the different factors that can affect the price of this asset, whether Soft or Hard.

  • The relationship between the demand for this asset and its actual supply. That is, if the supply outpaces its demand, the price of this specific asset type will drastically fall and vice et versa.
  • Natural disasters, for example typhoons, natural fire and other climatic changes which may affect the supply of a commodity in any way.
  • Political and economic instability. As stated above, commodities are used to determine the economic stability of a country. This is why the daily political and economic news released have an impact on the market.
  • Fluctuations in exchange rates. The financial market is very complex and many assets are inter related. Therefore, the performance of this asset on the market is linked to that of the currency market. As a result, if the US dollar loses ground, the price of crude oil normally goes up.

How to trade Commodities with Stellar Finance?

  • Log in your trading account. If you do not possess one, you are kindly requested to open one here.
  • Make a choice among our selection of trading tools.
  • Once you have your trading tool, click on the “Commodities” feature located on the “trading tools” button on the toolbar.
  • Choose Call if you think the price of the chosen asset will rise and select Put if you think the price will fall at expiry time.