Why are commodities more volatile than other assets?

Posted by Nayna Bhardwaj on August 22nd, 2017

Commodity trading is very profitable as this gives huge opportunities to traders. However, it is very risky too. Commodity trading is basically buying and selling of certain assets. Many traders prefer taking commodity tips. So that can invest with minimum chances of risk. An asset can be defined as a property or something of value. In the world of investing and trading there are classes of assets. The volatility of an assets is a critical concern for those who invest or trade their capital.

Volatility refers to the the price variance of an asset over time. The wider the price range from low to high on a daily, weekly, monthly, or longer-term basis the higher the volatility and vice versa. Some assets are less volatile. Whereas, some assets tend to be more volatile than others and it is often the variance of a market that makes it attractive or unattractive to market participants that have differing risk profiles.

One of the most important consideration is its variance, when the traders is considering which asset to invest in or trade. The assets which have higher degree of volatility tend to attract those who are active traders rather than investors. Whereas, the price of an asset is highly volatile, it attracts more speculative and short-term trading activity. Stocks, bonds, currencies, and commodities are the four most popular classes that offer varying degrees of volatility. Commodities volatility tends to be the highest among all the of the asset classes.

Reasons why commodities are more volatile:

Commodities are more volatile than other assets for these main reasons.

1. Liquidity:Each day the markets likes equity, bond and currency attracts a massive amount of volume. Many commodities that are traded on the futures exchanges offer much less liquidity or trading volume than the other assets. Whereas, oil and gold are the most liquidly traded commodities.

2. Mother nature: The weather as well as the natural disasters that occur around the world from time to time is determined by Mother nature. Hurricanes that hit the Louisiana Coast of the U.S. and did damage to natural gas infrastructure cause the price of futures to rise to all-time highs. These are just a few examples of how acts of nature can cause massive volatility in commodity prices.

3.Supply and demand: The path of least resistance for raw material prices is supply and demand is the major determinate. Production of commodities occurs in the area of the world where soil or climate supports crops. Every human being on earth is a consumer of commodities which are the staples of everyday life.

Commodity trading is very beneficial if you are having guidance and trading strategies from best stock market advisory, they will help you to know about the market trend and performance.