What is commodity (Commodity) and what do you need to know to trade it?

Meaning and Basic Characteristics of Commodity

Commodity refers to raw materials and natural resources used as basic inputs for manufacturing other products or daily services. These goods are standardized, measurable in quantity, and traded in clear markets.

Common examples include copper, crude oil, wheat, coffee beans, gold, and natural gas. All these examples share common features: demand from multiple sources, prices influenced by supply and demand factors, and limited supply.

Classification of Commodities

Commodities are divided into two main categories:

Hard Commodities (Hard Commodities)

Derived from mining, extraction, or quarrying. These are natural resources that cannot be reused. Examples include:

• Precious Metals: Gold, Silver, Platinum, Palladium
• Energy: Crude Oil, Natural Gas, Coal
• Other Metals: Copper, Aluminum, Nickel

Soft Commodities (Soft Commodities)

Produced through cultivation or livestock. These are seasonal and have limited shelf life, including:

• Agricultural Products: Coffee, Sugar, Rice, Cotton
• Livestock Products: Pork, Beef, Milk

The key difference is that Hard Commodities tend to be less volatile due to stable resources, while Soft Commodities are more prone to fluctuations caused by weather, diseases, and biological factors.

Factors Affecting Commodity Prices

Demand (

Income levels and population size are primary drivers. Developed countries demand more energy and precious metals, while developing countries have higher demand for agricultural products. Consumer behavior influences the price structure of each category.

) Supply ###

Depends on labor, capital, land, production capacity, and time. Investment in R&D, weather volatility, plant diseases, and infrastructure readiness significantly impact supply.

( Uncertainty Factors )

Natural disasters, extreme weather, climate change, and international economic events all affect prices. Investment and speculation activities in futures markets can create feedback loops, causing rapid price volatility.

How to Trade Commodities for Beginners

Since you cannot stockpile crude oil or natural gas at home, investors have several options to access this market:

Method 1: Factor-based ETFs ###ETF(

Buying shares of funds that track commodity prices without owning the actual goods. ETFs often invest in futures contracts or derivatives.

Advantages:

• Low initial cost, can buy just 1 unit
• High liquidity, tradable online anytime during market hours
• No storage issues or theft risk
• Transparent and relatively low fees

) Method 2: Futures Contracts ###Futures(

Agreements to buy or sell a commodity at a set price on a future date. Traders profit from price movements without taking delivery of the actual commodity.

Advantages:

• Profitable in both bull and bear markets
• Low initial capital due to margin trading )Margin(
• High liquidity

Disadvantages:

• Need to manage rollover before expiry
• High leverage risk

) Method 3: Stocks of Commodity Companies ###

Investing in shares of companies involved in production, mining, or trading of commodities, such as mining firms, oil producers, or large agricultural companies.

Advantages:

• Diversifies risk; returns come from multiple sources
• Well-performing companies can profit even when commodity prices are unfavorable

Method 4: Contracts for Difference (CFD)

Trade via online brokers without owning the actual commodity. Positions rise or fall with commodity prices.

Advantages:

• Profitable in both rising and falling markets without owning the underlying asset
• Leverage allows small investments for larger positions
• Market open 24 hours, 5 days a week
• Covers various markets, including stocks, indices, and currencies
• No rollover needed; just pay swap fees for overnight positions

Pros and Cons of Trading Commodities

Advantages

1. Hedge Against Inflation
Commodity prices tend to rise with high inflation, making them suitable for preserving value.

2. Diversification
Commodity prices have low correlation with stocks and bonds, reducing overall portfolio volatility.

3. Liquidity and Profit Opportunities
Prices can increase rapidly due to supply-demand imbalances.

4. Long-term Growth Potential
Resources diminish over time while demand continues to grow.

( Disadvantages )

1. High Volatility
Commodity prices are twice as volatile as stocks and four times as volatile as bonds, leading to rapid changes and potential misjudgments.

2. Leverage Risks
High leverage can lead to significant losses if not managed carefully.

3. Negative Correlation with Equities
Prices often rise when stock markets fall, which may not suit long-term investors.

4. Environmental Impact
Investing in commodities like oil, coal, or livestock can raise environmental concerns.

Costs Associated with Trading Commodities

Actual profits are not just the price difference; transaction costs must be deducted:

1. ( Spread )
   Difference between buy and sell prices. For example, gold buy at 1949.02, sell at 1949.47, spread 0.45. Profits must exceed this to break even.

2. ( Swap )
   Charged when holding positions overnight (23:59 น.), representing interest for borrowing.

3. ( Commission )
   Some instruments charge a commission for opening and closing positions, but not all.

Accurate profit calculation requires subtracting these costs from the price difference.

Commodity Trading Schedule

Commodities are not traded 24/7. The schedule is as follows (Thai Time):

Summary: What is a Commodity and How to Trade It

Commodity refers to natural resources and raw materials with clear markets, including energy, precious metals, agricultural products, and livestock.

There are various ways to trade commodities, from ETFs, Futures, CFDs, to stocks of related companies. Each method has its pros and cons. Beginners should choose based on their capital, portfolio size, and risk appetite.

It’s important to remember that commodities should not be the main component of a portfolio due to high volatility. They should be part of a diversified investment strategy. Additionally, investors must study details, be aware of transaction costs, and understand trading schedules to optimize their investments and manage risks within acceptable levels.