Commodities Trading
What is commodities trading and how can we profit from it? This surely is a question people have been asking for a long while, but which has nowadays become even more popular. Let’s try to trace out the basics of commodities trading and what are its advantages and (if there are any) disadvantages.
What in fact are commodities?
In order to live in our world, we need commodities – the raw materials we use. These may include agricultural products, metals and energy, which are, in fact, the three main commodities classes. Commodities are a crucial element of the global economy. There are three criteria a commodity has to meet: 1. Tradability; 2. Deliverability; 3. Liquidity.
Investing in commodities trading – is there a risk?
Before you invest in commodities, you should really consider there are some risky factors that may interfere and make you feel sorry for involving. In fact, they are three:
- Geopolitical risk– the main problem of commodities is that they are not in one place – they are spread all around the world. In other words, in order to obtain them and make profit from them, you will have to deal with the governments of different countries where the commodities you need are located. In fact, some of these countries are not too friendly to foreigners who want to obtain their commodities. In order to protect yourself from investing a lot in a commodity business and being hindered by the country where the commodities are, you should invest in companies with reputation and experience in the commodities trading.
- Speculative risk –There are people, like in stock trading, that make profits by speculating – whether the price of a particular commodity will go up or down. These people may mess up your trading plan. If you get involved in commodities trading, make sure you know who else is in the business – whom to believe, whom not to believe and who is a speculator.
- Fraud risk – In every undertaking there is a risk of you becoming a victim of a fraud. Don’t worry, it’s a part of the game. In order not to lose your investments as a result of a fraud, make sure where your money goes and whether you are investing in something stable and well-known.
What should I find out before investing in a particular commodity?
In fact, in order not to lose your money and to be successful commodities trader, you need to carry out your own research and answer to a number of questions:
- Which is the country with greatest amount of the commodity you wish to trade and is that country politically stable? – Perhaps, if the answer of this question does not satisfy you, you will have to pick out another commodity. It is very important to know with which country or countries you will have to interact and deal, what is there probable attitude towards you and will there be any hardship. If the country is not politically stable, your business may be affected by a change in the government, which will be connected to either great expenses or an insurmountable obstacle to your business.
- How much of this commodity is available now and who are your target customers? – Are you sure there is someone that need to get this particular commodity from you? And if the answer is yes – who are these people/industries/countries? There’s no use investing in commodities trading when there is enough of this commodity out there. Otherwise, you will end up having, for example, a lot more oil than you need for your car to run for 1 000 000 years or with bananas enough to feed the apes in every zoo in the USA for a year.
- Are there alternatives to the commodity you have chosen and are they more easily accessible? – If you are going to trade with a commodity that have a cheaper and more popular alternative, better choose that alternative. Otherwise, you may find out that most people prefer not to obtain your high-quality commodity but the other one – the one they can have without performing a financial suicide.
All in all, there are a lot of things to consider before investing in commodities trading. You will have to assess the global market, to carry out an exhaustive research and to find a company with enough experience and international relations to invest in. Once you have done this, however, you will find out that commodities trading is really profitable business worth investing in.
