All of us use the word commodities everyday in some or the other context and know what it means; and yet when it comes to Commodity Trading, most us don’t exactly know how to go about describing it. Commodities basically are raw materials used for making the finished products that are used in our everyday lives. Wheat and coffee beans, and sugarcane are the raw materials for finished products coffee and bread, and sugar respectively. Likewise, cotton & copper are raw materials for textiles used in clothing, and electric wires are used at our homes for electrification as well as in the industries.

There are hundreds of such finished products where thousands of raw materials are used. Some of these products are produced by all the countries and some are produced by select counties depending on factors such as the whether, natural resources etc. Pricing and supply of agricultural products for example are greatly influenced by weather; even natural calamities can impact their price dynamics. Price of product and its production are directly related to each other. When price for a certain commodity is high, such a commodity’s production increases; also, when price of certain commodity is higher the consumer does not show much inclination for it.

What the commodity traders do is they try and identify a commodity or set of commodities that they would like to buy and sell to earn profits arising from the price difference at which they bought it; and at which they were able to sell it. A favourable difference is when they buy a commodity and when its price increases they sell it and the difference is the profit they have earned on it; likewise if they bought something and the price of that commodity dips, they will sell that commodity at a loss. Though all this via explanation may look like a simple exercise to some, commodity trading is a tough game to break into.

After traders identify commodities they then look for companies that are trading publicly to invest in those commodities. Once listed companies are identified trading becomes easy. However commodity trading is not advisable for an average investor with limited budget. Traders before trading with their real money should first take a few trial runs via their demo accounts that their broker will provide them with. Also, traders who are not too confident about trading independently can take the Commodity Trading Advisors route where expert advisors manage accounts for their clients.

This kind of trading is done on futures exchange with futures contracts. Commodity trading happens to be highly volatile in nature. CME Group and Ice Futures in the US are the largest exchanges via which commodity trading takes place. Commodity stocks and commodity ETFs are most popular in this type of trading. ETFs are commodity future trading which works on the lines of mutual funds. Being unleveraged traders chances of losing get limited. For active commodity traders, being cash rich is of utmost importance. Trader can expect minimum slippage when the volume of a futures contract on a commodity is high; this also makes it easy for the trader to get in an out of a market that too at the most realistic price. The high volume commodities trading is the preferred choice for the day traders and those who trade in large size. Commodity trading that happens in small volumes is prone to erratic price swings.

Some of the most common commodities that are traded across the world includes Natural Gas ; Crude Oil ; Heating Oil ; Sugar; Copper; Corn; Wheat; Soybeans; Soybean Oil ; Silver; Cotton; Gold ; and Cocoa.

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