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The trade in commodities is one of the main foundations of the global trading system. For the serious investor, a knowledge in how to trade commodities is vital: great profits can be made if an investor has an in depth knowledge of the issues surrounding globally traded commodities, and knows the mechanics of how to trade them.
But though this trade has a long tradition, innovations are still occurring: advances in technology mean that new commodities are coming onto the market all the time, while the advent of online commodity trading means that access to global markets is now available to even private investors with a small amount of capital.
What are Commodities?
Commodities are a range of primary resources that can be traded in quantifiable amounts and have minimum quality standards. The establishment of such basic parameters means that the commodities can be traded in large volumes or numbers in international commodity exchanges, with traders being reasonably certain that the commodities being traded are not deficient.
Commodities may be divided into a number of classifications: agricultural commodities (corn, coffee, cocoa, pork bellies, frozen orange juice, etc), energy commodities (oil, gas, etc) and metal commodities (gold, silver, iron ore, copper, etc). There are also a number of commodities that fit no classification.
The spread of technology has allowed the introduction of new commodities, as technology for producing hi-tech products is disseminated around the world. Silicon chips are one such example, and a new commodity exchange dealing in nanomaterials (the Integrated Nano-Science Commodity Exchange) is due to launch in early 2011.
In addition, the recent focus on the environment has led to the establishment of exchanges that trade in environmental commodities. This includes trading in carbon emissions (both carbon offsets and carbon credits) and renewable energy certificates.
Commodities are traded on the commodity market. This market is comprised of a number of international commodity exchanges, notable ones being the Chicago Mercantile Exchange, the New York Mercantile Exchange and the London Metal Exchange. Officials of each exchange act to regulate transactions, amongst their responsibilities being the duty to ensure that the commodities traded meet minimum quality and quantity standards. The exchanges themselves are regulated by the appropriate national regulatory bodies.
A knowledge of the workings of these exchanges and the commodities they trade are essential for any investor wishing to learn how to trade commodities.
Commodity trading has been traditionally carried out by either floor traders that trade on their own behalf on the trading floor of commodity exchanges, or by firms of commodity brokers that carry out trades on behalf of others. These firms often maintain a large staff of brokers and are able to carry out trading on most if not all of the world’s major multi commodity exchanges.
The advantage of trading via a commodity brokerage is that such firms often offer advice and a vast range of information as part of their service: for an investor starting to learn how to trade commodities this support could be very important.
However, the costs of trading via traditional brokers are often high, and can be too high for some private investors. This has led to the rise of the discount commodity broker. Such brokers offer a cut price service, focused on trading rather than the advice surrounding it. To reduce costs, many discount commodity brokers operate via the World Wide Web: online commodity trading has become a growth area in recent years, with many commodity brokers competing to offer the best deal to new investors. Some can have welcome bonuses and benefits, so if you are an investor looking to start trading commodities it’s worth shopping around for the best deal.
More information on the various aspects of how to trade commodities can be found in the various sections and sub-sections of our site, accessed via the menu to the right.