Commodities are the marketable items produced to fulfil the need of the demand and supply. Commodity market is, as name suggests, a place where raw or primary products (commodities) are exchanged. For the purpose of trading it can be said that a commodity is either a raw product (corn, gold, sugar) or a financial instrument (foreign currency, bonds, etc). The purpose of commodity trading is to gain profits from escalation in prices of commodities. For example, you may choose to buy gold today and sell it again after a month or two when the prices increase, hence earn profit. However, in the commodity market, it is not the actually commodity that is bought. The buyer usually buys contract from commodity exchange. This is done to remove the hassle of checking the quality of commodity while buying it, hassle of finding an appropriate storage, transportation and security of commodity. For better understanding of how it all works, we would have to take a look at the below example:
« You buy a gold contract from commodity exchange. The minimum size of contract can be as low as 100 gms.
« The price of 100 gms of gold would be 288000. However, the buyer pays only a small fraction of amount. This price may vary from contract to contract.
« When the price of commodity increases in future, the percentage of that increase is credited to buyer’s account. And the amount is debited if the price decreases.
The advantage of commodity trading is that there are no balance sheets, no complicated financial statements. You do not have to be a financial pundit to invest. You just have to keep a close eye on the demand and supply position of the commodity you have bought in the market. The top 10 commodities that are being traded these days are:
Cotton is a soft, fluffy plant which grows in the shape of a boll or a capsule around the seeds of the plant called Gossypium. The existence of this plant was noticed around 7000 years ago and today its one of the most traded commodity in the world. Its uses are not limited to clothes, coffee filters, and paper but fishing nets, fire hoses, oil, cosmetics, medicines and what not. It is the world’s most commonly used natural fibre for clothing.
- Largest producers – China (26%), India (22%), USA, Pakistan, Brazil.
- Largest Exporters – USA, Australia, Brazil
- Symbol of Trading – CT
- Futures Delivery Months – March, May, July, October, and December
- Points to Remember – While trading in cotton futures, the buyer should keep a sharp eye at the yield of cotton crop throughout the world. If overall yield is low in top producers like China, India or USA and the prices would surely go up.
Wheat, a cereal grain is the most staple food available today for humans. It is not only very rich in proteins but is also considered to be the key factor in start of civilization as its considered to be one of the first crops that could easily be cultivated on a vast scale. It is third most produced cereal grain after Rice and Maize and also the most grown commercial crop in the world.
- Largest Producers – China, India, USA
- Largest Exporters – USA, France, Canada
- Trading Symbol – W, YW (Mini Wheat)
- Futures Delivery Months – March, May, July, September, December
Corn (Maize), a grain is a leafy stalk that produces ears which contains seeds called kernels. It is one the most grown crop throughout the world because of its ability to grown in diverse climates. Also it is world’s largest grown cereal after Rice and largest grown cereal crop in North and South America. There are basically two types of corns: field corn and sweet corn. Field corn is mostly used for animal feed & chemical purposes whereas sweet corn which is used for human consumption.
- Largest Producers – USA, China, Brazil
- Largest Exporters – USA, Argentina, China
- Trading Symbol – C, YC (Mini Corn)
- Futures Delivery Months – January, April, July
- Points to Remember – Corn production in US is on a drastic decline due to draught. Hence, the international prices are surely going to rise.
Sugar is a sweet flavoured food that is mostly extracted from sugarcane & sugar beet. It brings sweetness in life and in terms of investment it may bring similar effect to your portfolio. Though it is most important part of human diet in many parts of the world, it’s over use can lead to many diverse effects on the heath as well. From last few months sugar contracts are on continuous incline.
- Largest Producers – Brazil, India, China
- Largest Exporters – Brazil, India, China
- Trading Symbol – SB
- Points to Remember – Sugar is the best choice if the buyer is interested in looking for a long term investment.
Silver is a metallic chemical element which exists in the pure form naturally. It is mostly used to make jewellery, ornaments, utensils & currency coins. But apart from these domestic applications, silver is widely used in industries as well: electrical conductors, mirrors, chemical industry, photographic films, etc. It is valued as a very precious metal & has been used since ages to symbolize social or political rank.
- Largest Producers – Mexico, Peru, China
- Largest Exporters – Peru, China, India
- Trading Symbol – SI, QI (Mini Silver)
- Chemical Symbol: Ag
Copper is another chemical metal highly used for trading purposes. In fact, it is considered to be one of the oldest traded commodities of all times. It is been used from thousands of years in pure form as well as with alloys. It is world’s third most used metal after iron and aluminium and has been one of first few metals that were used by mankind.
- Largest Producers – Chile, USA, Peru
- Largest Exporters – Chile, USA, Peru
- Trading Symbol – HG
- Chemical Symbol: Cu
- Points to Remember – Copper is a commodity that reflects the world economy. In simple words, its incline and decline is directly linked with world’s economy in general.
Gold is a chemical metal which exists in soft, shiny form and is highly ductile & malleable. It is considered to be the ultimate possession and the source of richness. It is a pure medley of beauty, rarity and indestructibility. Since very beginning gold has been used as a mode of investment and has been constantly in use as currency. It is one of the most invested and most versatile metals on this planet.
- Largest Producers – China, Australia, USA
- Largest Exporters – China, Australia, USA
- Trading Symbol – GC, YG (Mini Gold)
- Chemical Symbol: Au
- Points to Remember – Gold is one of the most profitable commodities and is constantly on rise since last few years. It is advisable for every investor to have certain amount of gold profiles in his portfolio. However, entire portfolio should not be filled with gold futures.
3. Natural Gas
Natural Gas is the one the most important energy sources that occur in natural form mainly used for the purpose of heating and electricity. 25% of USA’s energy consumption is in form of natural gas. It is a gas mixture consisting primarily of methane along with CO2, and nitrogen. Natural gas is usually found in proximity of crude oil which is world’s most traded commodity.
- Largest Producers – Russia, USA, Canada
- Largest Exporters – Russia, Canada, Norway
- Trading Symbol – NG
Green Coffee is basically the coffee beans that have not been roasted. Its origin is dated back to 1100 AD from the parts of Arabia. It is legally the second most traded commodity in the world. It is cultivated in over 70 countries (majorly in Latin America, Southeast Asia) and is also world’s seventh largest agricultural export in the world.
Largest Producers – Brazil, Vietnam, Indonesia, Colombia, India
- Largest Exporters – Brazil, Germany, Colombia
- Trading Symbol – KC
- Futures Delivery Months – March, May, July, September, December
- Points to Remember – Coffee is one of the few commodities that faces very frequent price changes.
1. Crude Oil
Crude Oil that is famously known as Petroleum is a flammable mixture of hydrocarbons and various other organic materials found beneath earth’s surface. It is a fossil fuel and is considered to be one of the most expensive commodities due to its finite availability and extensive requirement in today’s world. Crude oil is world’s most traded commodity and crude oil commodity is world’s most popular way to trade crude oil.
- Largest Producers – Saudi Arabia, Russia, USA
- Largest Exporters – Saudi Arabia, Russia, Iran
- Largest Consumers – USA, China, Japan
- Trading Symbol – CL
- Points to Remember – Because it is most popular and most traded commodity, its price is very volatile in nature. Crude oil trading requires extra attention.