Basic Facts About Commodity Trading
Posted by FinanceBrokerage on March 20th, 2020
Commodities are the most basic and reliable goods to base your trading on. The practice of exchanging commodities is so old that it may, in fact, be the very first form of trading. A commodity could denote any physical item which humans value. As such, they will continue to be a vital part of trading as long as humans exist. This could be perishable items like wheat, meat, and animals. Its items could be for energy, like oil, natural gas, or coal. It could also be items with less immediately obvious practical uses like gold and silver.
A Short History of commodity trading
There is obviously quite a disconnect between how commodity trading may have functioned thousands of years ago, and how they function today. This is why we will shortly go over the history of commodity starting in the ancient era.
Originally trading in commodity trading referred to trading commodities of equal value without any intermediaries (i.e. money). This could be grains for gold, or any trade people could think of with the available materials. Monetary exchanges would have started over 6000 years ago, around 4000 BCE. In the ancient world (Mesopotamia, Egypt), people would have traded these items directly. Monetary exchange systems began to develop soon after. In Sumer, for example, townsfolk would exchange clay tokens in exchange for, say, livestock. In tandem, they developed writing systems to record and keep track of all their exchanges. Usually, you could see the engravings of this information on clay writing tablets. You could equate these clay tablets with something like the earliest contracts.
As time went on, people began to value other commodities. One of the most notable is gold and silver, whose visual appeal made them very popular. People began to adorn themselves in them to display their status. People could easily create any shape from them and adjust their volume. As these items were so valued but did not have much practical use, they slowly found alternative applications. People began to these as an intermediary exchange, a form of currency.
As time went on, people still exchanged commodities for other commodities, services, or land. They would usually try to estimate their values by weighing said commodity. People used Gold and silver alongside these traditional commodities as an alternative.
By 1530, we approach something close to modern trading, with the founding of the Amsterdam Stock Exchange. People would use, what are today, rudimentary contracts for exchanging goods. This includes forward contracts, options, and short sales. This sort of institution became quite popular and spread all over Europe and subsequently to the United States. From there it continued to develop into the 19th and 20th centuries.
In this day and age, you have two options available to you. If you do decide you want to get involved in the commodities market you should keep in mind the types of markets available. These are the Over the Counter market (OTC) and the Exchange Based market. OTC markets involve the direct exchanges of goods between two parties, without an intermediary. An Exchange Based market is organized through a clearinghouse for the parties involved, to ensure that a settlement takes place.
Popular Investment Commodities
There are obviously a countless number of commodities worth looking into for trading. To give you an idea of what is available to you, we will give you a short summary of the most popular type of commodities available. These fall under a few different categories: agricultural (meat and agricultural), energy, and metals.
This includes almost all consumable items; meat and agricultural products. It also includes livestock, from which other items such as meat, milk or wool can be derived. The most important of these are as follows:
Grains - Since the start of agriculture, grains have remained a staple for human survival. Although not the most nutritious foods, their relative simplicity meant that they could be grown in large volumes. This has given people the possibility of survival in times of starvation.
Oilseeds - Usually used for extracting oil, and for creating a meal with the remaining product.
Meat - A self-evidently important resource for human nutrition.
Dairy - They are produced from livestock, which people use as supplementary food items.
Coffee - A product that people continue to be consumed worldwide. Although it has no direct nutritional benefit, it is highly valued for use against fatigue.
Energy commodities are resources, usually non-renewable, which can be consumed to produce energy. The energy they produce can have multiple uses, although most of these revolve around electricity and transport. This can include:
Crude Oil - This is the commodity which, while not so useful raw, can be further broken down into numerous beneficial products. This includes such valuable commodities as gasoline and heating oil.
Gasoline - Essential for allowing many vehicles to function, alongside with diesel. The near future looks dire for gasoline, however, as manufacturers have started looking into electric vehicles.
Coal - A commodity that was used for heating and powering locomotives in the past. It finds its primary use today in electrical generation. As people become more concerned about the environment, it seems likely that renewable energies may soon take its place.
Heating Oil - Commonplace in many households for heating in boilers and furnaces.
Natural Gas - Another resource used for heating. It seems likely that it will replace alternative resources for heating, as it leaves a much smaller imprint on the environment.
Metals and minerals hold a huge section of the market. Whether it is for their visual appeal or their practical uses when manufactured, they are highly valuable. We can further divide metals into two parts: base and precious metals.
Base metals are those which have widespread practical use in manufacturing and are common. They are quite susceptible to wear and tear as well.
Aluminum - A sturdy resource that is very easy to manage because of its relatively lightweight.
Copper - A common metal that has found use in many fields. These range from use in electrical wires to roofing and guttering. It is highly malleable and is quite common.
Tin - Quite commonly seen today for use as cans. Its most valuable uses, however, is in making an alloy with copper to make bronze.
Precious metals are those more often used for decorative purposes. Many can still, however, be used in manufacturing, but their relative rarity means they are used in lower volumes. They also tend to be less likely to rust or degrade, so they are sometimes used for medical purposes (e.g. fake teeth).
Gold - This is one metal that people have highly valued throughout human history. It remains one of the most highly valued assets to this day. So much so, that people continue to use it as a safe-haven asset in times of economic uncertainty.
Silver - Another metal used throughout human history. It has had similar uses to gold in jewelry and as a currency. It has, however, also become invaluable in electronics.
Platinum - Also finds decorative purposes, and has found uses in dental and electrical applications.
We hope we have given you a basic outline of the history of the commodity market and its most popular resources.
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