This article was written in partnership with IG, the world’s No.1 CFD provider (by revenue excluding FX, February 2018).
Commodity trading may seem like a niche column within the personal finance space. While there may be some truth to this statement, it’s also worth noting that commodity trading, unlike newer asset classes like cryptocurrencies and peer-to-peer lending, have been around for a really long time.
A Short History In Commodity Trading
Commodity trading and futures trading in commodities started because of a simple but profound problem. While the producers of commodities may produce more (or less) depending on current market prices and demand, all commodities require time and money to produce and process, before it’s delivered from producers to buyers and subsequently, end consumers.
This means that producers (e.g. a farmer who is growing rice) are essentially taking a huge risk, on behalf of everyone else, when they produce commodities. A lot can happen between the time they start growing their crops, to the time the crops are harvested and sold to buyers.
In order to mitigate this risk, future contracts were created. Future contracts are simply agreements to trade an asset (i.e. rice) at an agreed price and date in the future. This protects commodity producers as well as buyers who want price certainty and delivery of goods.
Future contracts can be traded in commodities exchange. Think of this as a stock exchange, only that various commodities and derivative products are traded, instead of stocks and ETFs.
Through a broker like IG, retail traders can trade commodities that are found on commodities exchange. This is mainly done through CFDs futures, or contracts for difference(CFDs).
Read More On IG: What Is A CFD And How Does It Work?
With the wide range of commodities available for trading, you may be surprised to find that some of the everyday products that you use can also be traded.
# 1 Platinum
Besides being used for wedding bands, platinum is also used for medical and industrial purposes. Platinum is an extremely rare metal, with most of the world’s supply found in South Africa.
With the supply and production of platinum concentrated largely in just one country, economic and political situations within the country, or the region around it, will have a big impact on its prices. Any increase or decrease in the industrial application of platinum will also impact its demand, and consequently, its price.
Platinum, like all other metals is traded in weight, with one contract being 50 troy oz (about 1.55kg).
# 2 Aluminium
Aluminium is the world’s second most commonly used metal, ranking only behind steel. It’s used to build diverse products from cars and planes to drink cans and many other household items that we use on a daily basis. One of the main reasons for its widespread use is due to its key characteristics – being both a strong and light material.
Aluminium, like most other industrial metals such as lead and copper, are traded in tonnes, with each future contract worth 25 metric tonnes (about 25,000kg).
# 3 Orange Juice
Yes, you read it right. Orange juice is traded on the commodity exchange.
What exactly is being traded? Well, not exactly the freshly-squeezed tasty liquid that you typically find at a fruit juice stall, but actually the orange juice concentrate. Being in Singapore, most of us may not realise that oranges are not easy to grow, taking on average of about 3-4 years before they are able to bear fruits.
Orange Juice is sold by its weight, with each future contract worth 15,000 pounds.
# 4 Soya Bean
If you are a big fan of Mr Bean or are lactose intolerant, you will be glad to know that you can trade soya bean future contracts.
Besides producing soy milk, which is what most Singaporeans commonly know it for, soya bean can be used to produce other types of food such as oil, tofu and margarine. The left-over fibre that remains after the beans are processed can also be used as animal feeds.
Soya bean is grown all over the world including major economies such as the U.S., Brazil, China and India. Factors that will impact its price include the strength of the US Dollar, as well as production supply and demand from emerging markets.
# 5 Live Cattle
Live Cattle refers to cattle that have reached the necessary weight for slaughter. These are cattle that can provide milk, meat, leather and even labour. Each life cattle contract is about 40,000 pounds. For reference, a full-grown adult male cow weighs about 1,300 pounds.
Similar to other commodities, cattle production and demand are impacted by factors such as weather, health matters and import/export restrictions. These factors, as well as many others, can impact supply and demand and consequently, price.
Commodity Trading Utilises Leverage, Trade Cautiously
Like all types of investing and trading, you should invest and trade into asset classes that you are familiar with, and only when you are able to stomach the risk. Commodity trading is no exception.
Though active commodity trading is a necessity for the global economy to function effectively, retail traders must be aware of the risks that they are exposed to when they trade these commodities. Corporations and businesses who are reliant on commodities for their business typically do a good job utilising them to mitigate their risks.
Retail traders likewise have to practise their own risk management habits. You can watch this video that we did where we tried to explain how risk management works, through learning how to bake.
If you are keen to further explore commodity trading, or like to find out more about how you can get started, you can check out the various courses and live seminars that IG provides under its Academy.
They have a commodities news and insight page where you can discover the latest updates on various commodities that you might be interested to trade, and also read about the insights provided by experienced analysts covering specific commodities.
All views, opinions and recommendations expressed in the article are the independent opinion of DollarsAndSense.sg and do not in any way reflect the views, opinions, endorsements or recommendations, of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes only and does not constitute any form of investment advice nor an offer or solicitation to invest in any financial instrument. No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material.