Understanding (Commodity) and the appropriate trading methods

What is a Commodity

Commodity refers to basic raw materials used by humans to produce various goods or services in daily life. These include copper, crude oil, wheat, coffee beans, and gold. These products have unique characteristics that cause their values to fluctuate based on global market demand and supply.

Investing in commodity stocks and commodities is a popular risk diversification strategy among modern investors. When stock and bond markets are volatile, commodities often move in the opposite direction.

Classification of Commodities

Commodities are divided into two main groups: Soft Commodities and Hard Commodities.

Soft Commodities are products from agriculture and livestock, such as coffee beans, orange juice, sugar, meat, and agricultural products. These have limited shelf life and their prices tend to be highly volatile due to weather and seasonal factors.

Hard Commodities are products mined or extracted from natural resources, such as copper, gold, silver, crude oil, and natural gas. These are finite natural resources, providing long-term value.

Factors Affecting Commodity Prices

The prices of commodities depend on several factors:

Demand and Supply: When demand increases and supply is limited, prices rise. In developed and developing countries, demand for commodities like meat and energy products continues to grow.

Weather and Natural Disasters: For Soft Commodities, abnormal weather, global warming, and natural disasters directly impact yields.

Speculation and Investment Cycles: Large capital movements in futures markets can add volatility.

Global Economic Conditions: Commodity prices often move inversely to the value of the linked currency, especially when central banks ease monetary policies.

How to Trade Commodities for Beginners

For novice investors interested in trading commodities, several options are suitable:

1. Exchange Traded Funds (ETF)

Commodity ETFs offer investors with limited capital the opportunity to invest without holding the physical goods. Most ETFs invest in futures contracts or derivatives to access commodity prices.

Advantages of ETFs include the ability to buy and sell on online platforms during market hours, no need for storage concerns, and high liquidity.

2. Futures Contracts (Futures)

Commodity futures are agreements to buy or sell at a predetermined price in the future, allowing investors to invest with smaller capital due to margin requirements. Trading futures can profit from both rising and falling prices.

Popular futures instruments include gold (XAUUSD), crude oil WTI (USOIL), natural gas (NATGAS), and copper futures.

3. Commodity Company Stocks

Investing in commodity stocks of companies involved in production and trading of commodities is another option. Leading global companies include BHP Group Ltd., Rio Tinto Group, and Vale SA. These stocks are traded on major international stock exchanges.

4. CFDs (CFD)

Trading commodity CFDs offers high flexibility. Investors can open long or short positions without owning the actual commodities. CFDs allow holding positions overnight without the need for rollover, unlike futures contracts.

Benefits of Trading Commodities

Hedge Against Inflation: Commodities like gold and oil tend to increase in value as the cost of living rises.

Diversification: Commodities have low correlation with other assets such as stocks and bonds, making them suitable for portfolio diversification.

High Return Opportunities: During uncertain economic times, commodity prices can rise rapidly due to market imbalances.

Long-term Growth: Natural resources are depleting over time, while demand continues to grow.

Risks to Watch Out For

High Volatility: Commodities are 2-4 times more volatile than stocks and bonds. Rapid price swings can lead to poor investment decisions.

Leverage Risks: Using high leverage increases potential profits but also significantly raises the risk of substantial losses. Miscalculations can wipe out the entire investment.

Uncontrollable Factors: Weather, natural disasters, and global monetary policies are unpredictable variables.

Environmental Impact: Mining, extraction, and production of certain commodities like crude oil can harm the environment, potentially leading to stricter regulations.

Trading Costs to Consider

When trading commodities, investors should be aware of costs that can eat into profits:

Spread (Spread): The difference between bid and ask prices. For example, if gold bid is 1949.02 and ask is 1949.47, the spread is 0.45.

Swap/Financing Cost: Fees for holding positions overnight, charged at 23:59.

Commission: Some instruments charge commissions for opening and closing trades.

Therefore, calculating true profit requires deducting these costs from the gains from price movements.

Commodity Trading Schedule

Commodity trading does not operate 24/7 but depends on the nature of the commodity and the time zone of the main trading market.

Gold (XAUUSD): Opens Monday at 06:00, closes at 00:00. Tuesday to Friday open at 00:00, close at 24:00. Saturday closed, Sunday opens at 06:00, closes at 05:00 (Thai time).

Crude Oil (USOIL): Monday opens at 06:00, closes at 00:00. Tuesday to Friday open at 00:00, close at 24:00. Saturday closed, Sunday opens at 08:00, closes at 05:00.

Natural Gas (NATGAS): Same schedule as gold.

Copper (COPPER) and Silver (XAGUSD): Monday opens at 08:00, closes at 00:00. Tuesday to Friday open at 00:00, close at 24:00.

Coffee (COFFEE) and Sugar (SUGAR): Monday opens at 16:15, closes at 00:00. Tuesday to Friday open at 00:00, close at 24:00.

Summary and Recommendations

Commodities are valuable assets for diversification, especially during economic uncertainty.

For beginners, start by understanding the characteristics of the commodities of interest, factors influencing prices, and associated risks. Choosing platforms with low commissions, narrow spreads, and good service is important.

However, do not invest solely in commodities due to their high volatility. Include commodities as part of a diversified overall portfolio and fully understand all risks before investing.

⚠️Warning: Investment involves risks and may not be suitable for everyone.