What are Commodities?

Unlike other tradable assets, commodities are tangible assets that have uses as more than just financial instruments . These basic resources are things whose characteristics do not change significantly across the market, so that the price of each unit can be the same. This allows them to be traded on a commodity exchange in the exact same way that currencies and stocks are traded.

Because of their unique relationship with the life outside of the financial markets, commodities are influenced by factors beyond those of other assets. And in turn, their prices can actually impact people all over the world. Because commodities are usually items that people come across in their day-to-day life, it can be easier for some people to understand how to do fundamental analysis. On the other hand, the added factors influencing price mean you have to do your research carefully and not neglect technical analysis.

Soft Commodities vs. Hard Commodities

Soft commodities refer to food items like coffee, wheat or sugar as opposed to commodities that are mined like precious metals or oil. Although hard commodities can be effected by things like the weather, usually it is soft commodities that are influenced the most by agricultural variables like harvest conditions. Seasonal changes mostly affect hard commodities on the demand side, while they make the biggest difference in the supply of soft commodities. This means that soft commodities tend to have more price fluctuations that are unrelated to whatever is going on in the market in general. Certain hard commodities are closely tied in to other markets. For example, fuel prices depend on manufacturing, and therefore have a correlation to stock prices, and gold is considered a safe-haven asset for investors who are worried about the futures of currencies.

Advantages and Disadvantages of Soft Commodities

As with all assets, soft commodity trading has its advantages and disadvantages and the most important thing is to do your research. Because soft commodities are usually food, you can be sure that they will always have significant value. Traditionally, the major disadvantage of soft commodities was the fact that they are perishable. If you bought a warehouse full of orange juice, you could not hold onto it as long as you wanted. Instead, you had to make sure to sell it again before it went bad. For short term online traders, this is not a problem. Instead of being in a rush to sell your soft commodity, make sure to use technical analysis to pinpoint the best entry and exit points for your trade and prepare properly to minimize the risk of trading these volatile assets.