The commodity market is one of the least understood financial markets in the world. Most people have only a vague idea of how it works. This is unfortunate because potentially the commodity market can be one of the most profitable places to trade. This of course assumes that you know what you are doing and most people don’t. If you decide that you want to enter the commodity market you need to make an effort to learn everything that you can about it. There is a lot to learn but once you do you are entering one of the best places you will find to make money.
A commodity is a product for which there is no way to differentiate between that offered by one manufacturer and that offered by another. For example gold is gold regardless of where you buy it you will be getting the same thing. In practice the commodity markets are places where raw materials are traded. These can range from gold to oil to cows to soybeans. Commodities are normally traded by using futures that is people are gambling on how much a commodity will cost on a specific date in the future. The commodity market can be very profitable but there can also be a lot of risk involved.
When most people think about trading commodities they automatically assume that it is very risky and it is something they should stay away from. In fact the commodity market was created so that commodity producers and the manufacturers that use them can reduce their risk. Things like the price of oil can fluctuate dramatically and this can make it hard for the oil producers or the companies that use oil to do any long term planning.
They want to have price certainty, the producer wants to know how much they will be able to sell oil for while the users want to know how much they will have to pay for it. The futures market allows them to do this they can get price certainty by allowing speculators to take the risks in exchange for the profits to be made from changing prices.
The commodity market is usually used as a means of speculating rather than as a long term investment. A commodity is often held for a matter of only a few minutes and it most it will only be held for a few weeks. A big part of the reason for this is that futures contracts are heavily leveraged. This means that you can make or lose a lot of money on just a small move by the underlying commodity.
Most commodity traders are specialists who focus on one specific commodity like gold or oil rather than trading a large number of commodities. This allows them to get to know their commodity and have a feel for how it moves. This isn’t to say that you can’t get into the commodity market without being a specialist but it will take a lot of work on your part to make money in this game.