Online Commodity Trading
Online commodity trading involves the trading of various commodities in either a cash market or a futures market. Trading in a cash market involves immediate payment and delivery, whereas trading in futures entails agreeing today on the price of an asset that will be delivered at a fixed future date. Online traders usually use futures contracts to trade in commodities.
A commodity can be defined as an asset which is traded on a commodity exchange, usually through futures contracts. Commodities that can be traded include actual assets, financial instruments, financial indexes and foreign currencies. Well-known classes of commodities include soft commodities, metals, chemicals, livestock, energy, currencies and financial futures.
Soft commodities are central to the futures market. Commodities that are labeled as soft include grains and cereals, sugar, coffee, cocoa, orange juice and cotton. In ancient times, farmers needed a way to ensure that they would make a profit off the crops that they had planted. This led to the development of futures contracts which were used by farmers and buyers to determine the price that soft commodities would be sold at long before they were actually harvested.
Metals that are frequently traded online include gold, aluminum, silver and platinum, while commonly traded fuels includes propane, gas-oil, heating oil, light crude oil and Brent crude oil. Currencies such as the British pound, Japanese yen and Swiss franc are regularly traded on the futures commodity market, while frequently traded financial indexes include the London FTSE 100, the Mini Dow Jones and the Nikkei Index.
Online commodity trading is viewed by many as being extremely risky as it is usually done through futures contracts. As the price of a particular commodity fluctuates depending on supply and demand, trading in this sector involves guessing the supply and demand ratio for a specific commodity on a predetermined future date.
In order to determine the future price of a commodity with reasonable certainty, you need to thoroughly research the past and present performance of the commodity. Factors that you need to keep a close eye on include the specific markets that you are speculating on, interest rates, competitor products and general market fluctuations. Trading online simplifies this process by making information readily available whenever you need it. Commodity charts supply information about the daily, weekly, monthly and historical performance of commodities. In most cases, this information will be supplied free on online trading company and financial information websites. Websites supplying useful commodity market information include TFC Commodity Charts , The Financial Times and Hemscott .
Like other forms of derivatives trading, online commodity trading requires the constant, comprehensive monitoring of various markets. Unless you have the time and the expertise, it is advisable to open up an account with an e-broker who will be able to research the markets and make informed decisions on your behalf. Recognized online brokers such as ETRADE, Barclays and American Express Investments all offer online commodity trading as one of their services. Alternatively, you could also invest in a commodity pool and limit your risk to the total amount that has been invested in the pool.