trading cfd

Investing in the commodities market: an opportunity for investors to seize?

Stock market speculation has become much more accessible in just a few years thanks to the appearance of a host of brokerage companies. These brokers do everything they can to ensure that everyone can access a wide variety of assets and derivative products. However, despite all the options available to them, few individuals invest in commodities. How to explain this? This is what we are going to discover.

What is a raw material?

Raw materials correspond to natural resources essential for the manufacture of manufactured products. To date, there are 3 main families of raw materials, namely:

  • Agricultural products (wheat, corn, soya, etc.);
  • Metals (copper, tin, gold, silver, etc.);
  • Energy sources (gas, oil, etc.).

Of course, these products are particularly popular with manufacturers. However, individuals and investment banks may be interested in it. For most financial institutions, commodity market operations are essential to diversify assets and best manage risk.

Still, raw materials are classified into two groups:

  • So-called “hard” ones including precious metals (gold, silver) and oil which are assets quite popular with traders;
  • So-called “soft” products, mainly agricultural products which arouse less interest for investors, but whose volume traded may surprise more than one person.

How does the raw materials market work?

Raw materials are traded on dedicated financial markets, such as the CBOT for wheat, corn and rice, the COMEX for gold and silver or the LME for copper or tin. Despite the existence of the latter, the raw materials market is only partly regulated. The buyer and seller freely define the terms of the transaction by concluding specific contracts. This is why it is difficult for individuals to establish themselves in this market.

Regardless of the terms of sale and purchase, global commodity prices have soared in recent years. Multiple factors dictate the value of each asset, including market demand, weather conditions or the economic situation in the country where most producers are located.

In this second half of 2021, operators around the world are worried about the surge in raw material prices. This increase in prices would be linked to the post-COVID economic recovery. With the health situation seemingly improving, activities are resuming and demand is increasing. However, the pandemic and climatic hazards have had a major impact on many sectors and to date supply is struggling to meet demand.

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For buyers, the futures market constitutes the only solution to control the cost of raw materials. By ensuring future delivery months in advance, the operator manages to protect itself from rising prices. Furthermore, it also manages to protect itself from currency effects. However, he will lose if prices collapse.

How to trade commodities?

Given all this information, it goes without saying that the raw materials market is not entirely accessible to individuals. Indeed, it is a poorly regulated and opaque market where institutional players reign supreme. Furthermore, it is a question of purchasing a physical asset. If you are unable to resell the titles, you will have to receive and store the ton of coffee you purchased.

Please note, however, that there are solutions for trading raw materials while avoiding these disadvantages. To do this, all you need to do is turn to a suitable financial instrument.

CFDs (Contract for Difference) seem to be the best option for trading in the commodities market. This instrument, available from most online brokers, allows you to simulate the purchase or sale of a certain quantity of the chosen asset.

Trading CFDs means betting on the rise or fall in the price of the asset. You will choose a time frame when opening a position. When this is closed, you will gain or lose the difference between the entry and exit prices. This solution also offers considerable leverage since the amount invested will ultimately have little impact on your earnings.

To note : Trading CFDs involves risk of loss. Please consider carefully whether this type of instrument is suitable for you. Past performance does not represent future results. The articles and content on this website are for entertainment purposes only and do not constitute investment recommendations or advice.