Many people are looking to generate some extra wealth, make some money to treat themselves with, or even change careers. Investing can be a viable way to achieve all of these things. Although you might think this is hard to get into, that is no longer the case. Investing can now be transacted online from home and will often bring better returns than parking your spare cash in the bank.
One way of investing in the global financial markets is by trading commodities. This involves trading raw materials in sectors such as energy (oil or gas), metals (silver or gold), livestock (cattle), and agriculture (sugar or grain). But what are the basics of commodity trading to know about, and how does it differ from trading stocks?
What are the basics of commodity trading?
If you plan to make some extra cash through trading commodities or want to make it a full-time career, you need to know the basics first. Understanding them will help you to succeed and also keep you safe while trading online.
The first thing to get to grips with is where you will trade. This involves signing up with an online broker that provides access to the commodities market. There are many online brokers around to use, and it is essential to do your research before settling on one. Taking time to check the reviews somewhere like AskTraders is worthwhile and will help you find a reputable broker. Using this site to find a good broker is also much easier and quicker than trying to do it all yourself!
Once you have found a safe and reputable broker to trade commodities with, the thing to know is what you are trying to achieve. In simple terms, you aim to buy the commodity at a low price and then sell it for a higher one at some point. The difference in these prices is your profit. Whether you trade in gold, oil, or coffee, this same basic principle applies.
Strategy and chart analysis are key
When it comes to the basics of commodity trading, how you will find good trading opportunities is something to consider. The first thing most people will do is draw up a trading plan to follow. It sets out various things like what commodities you plan to trade in and how much you will risk per trade. It should also set out how you will find opportunities for trades. This is usually done by looking at the latest chart for the commodities you plan to trade and seeing what they tell you.
Many traders will use various technical indicators (such as moving averages) to help them find opportunities, or they keep an eye out for specific patterns in price movements. Some will also keep an eye on the latest political/economic news because that can significantly influence commodity prices.
What is the difference between trading commodities and stocks?
Investing money into the world’s financial markets comes with various choices. As well as trading commodities, for example, you could also trade stocks. If you go this route, first make sure to get to speed with how to get an edge when trading stocks. Although both involve the same general principles, they do differ in a few crucial ways.
To begin with, what you are trading is different. Commodities are real, physical goods (such as wheat or cocoa), but stocks are not. Trading commodities is usually done on a shorter timescale by most investors to take advantage of the market’s volatility.
Trading on any global market involves what is known as the Bid/Ask spread. This is essentially the difference between the price you buy an asset for and the eventual sale price. Stocks tend to have lower bid/ask spreads (due to the high volume/liquidity), whereas trading some commodities with lower liquidity/volume can bring wider bid/ask spreads.
The last significant difference in trading stocks and commodities is when the market is open. Commodities can be traded pretty much 24/7 (apart from weekends), but stock markets open and close at set times. That means the stocks held on them can only be traded between those hours.
Commodity trading is a viable option
In truth, neither stock trading nor commodity trading is better than the other. It comes down to personal choice and which you feel most comfortable getting involved with. Commodity trading can often be a little more volatile than stocks, though, so it is worth getting the basics down if you head this route.