Commodity Trading Beginner's Guide: What Exactly is the Commodity Market?

In recent years, an increasing number of investors have begun to focus on the Commodity Market. Before engaging in trading, it is crucial to understand the basic concepts and operational mechanisms of commodities. This article will help beginners gain a comprehensive understanding of what commodities are, how to participate in commodity market trading, and the associated opportunities and risks.

What is the Commodity Market? An Explanation of the Nature of Commodities

Commodity refers to basic raw materials used for producing other products or directly for consumption. These substances typically have high substitutability and prices are determined by the market. Common commodities include copper, crude oil, wheat, coffee beans, and gold.

Based on origin and characteristics, commodities can be divided into two main categories:

Main classifications of commodities

Soft Commodities — from agricultural cultivation, with limited shelf life

• Agricultural products: sugar, cotton, cocoa, coffee
• Livestock products: pork, beef, etc.
• Characteristics: easily affected by uncontrollable factors such as weather and pests, with significant price fluctuations

Hard Commodities — obtained through mining or extraction, classified as non-renewable resources

• Energy products: crude oil, natural gas, coal
• Precious metals: gold, silver, platinum, palladium
• Characteristics: supply is relatively fixed, fluctuates with global demand

Active commodity types in financial markets

The most commonly traded commodities by investors include:

• Agricultural products: Coffee (COFFEE), Sugar (SUGAR)
• Energy varieties: US WTI Crude Oil (USOIL), Brent Crude Oil (UKOIL), Natural Gas (NATGAS)
• Precious metals: Gold (XAUUSD), Silver (XAGUSD), Platinum (XPTUSD), Palladium (XPDUSD)
• Industrial metals: Copper (COPPER), Aluminum (ALUMINIUM)

Besides gold, commodities like coffee, sugar, and soybeans are also popular in Asian markets.

Drivers of Commodity Price Fluctuations

Demand-side factors

• Population growth and income increases directly boost commodity demand
• Changes in consumption habits (e.g., shifting towards meat and dairy) alter commodity demand structure
• Economic cycle fluctuations impact different commodities to varying degrees

Supply-side factors

• Constraints on production factors: labor, capital, land, water resources
• Technological advancements and production efficiency
• Impacts from natural disasters, epidemics, and other emergencies
• After the 2008 global financial crisis, investment in commodity production significantly declined

Uncertainty shocks

Extreme weather caused by climate change directly threatens agricultural output. Geopolitical situations and policy adjustments can also trigger sharp price volatility.

Market feedback loops

Speculative behaviors by investors can amplify price fluctuations. When prices rise, more capital flows in; when prices fall, capital exits accelerate the decline. Ultimately, prices are determined by supply and demand imbalance—an increase in demand or limited supply will push prices higher.

Advantages and Risks of Participating in the Commodity Market

Main advantages of trading commodities

1. Hedging against inflation risk Prices of gold, silver, crude oil, and other commodities are usually positively correlated with inflation. When living costs rise, these assets tend to appreciate.

2. Portfolio diversification Commodities have low correlation with stocks and bonds (correlation coefficient usually below 0.3), effectively reducing overall investment risk.

3. Sufficient liquidity Mainstream commodities (such as gold and crude oil) are highly active, with small bid-ask spreads, allowing flexible opening and closing of positions.

4. Short-term profit opportunities Sharp price fluctuations caused by supply-demand imbalances or unexpected events create substantial profit potential for short-term traders.

5. Long-term growth potential As the global economy develops, demand for certain commodities continues to rise, while supply remains relatively limited, providing clear long-term bullish prospects.

Risks to be aware of when participating in commodity trading

1. Leverage risks Commodity trading often involves leverage; the higher the leverage, the greater the risk. Excessive leverage can lead to rapid margin calls and account liquidation.

2. High volatility challenges Commodity price swings are typically twice as large as stocks and four times as large as bonds. In extreme cases (such as crude oil and gold), volatility can be even more intense, increasing the likelihood of poor trading decisions.

3. Inverse relationship with equity assets During economic downturns, commodity prices often decline, posing risks of losses similar to stocks.

4. Environmental and policy risks Industries like mining, oil and gas extraction, and livestock face increasingly strict environmental regulations, raising long-term costs and compressing profitability.

Four Ways for Beginners to Enter the Commodity Market

Method 1: Commodity ETFs

Purchase exchange-traded funds that track commodity indices, without needing to hold physical commodities.

Advantages:

• Low minimum investment, just one unit to participate
• Flexible trading, can buy and sell anytime during trading hours
• Avoids issues related to physical storage, theft, and additional costs

Method 2: Futures Contracts

Lock in current prices via contracts, with profits realized through delivery or closing positions before delivery.

Advantages:

• Bidirectional profit mechanism, opportunities in both rising and falling markets
• Only require margin, enabling larger positions
• Suitable for traders with limited capital

Method 3: Stocks of Commodity-Related Listed Companies

Buy stocks of listed companies engaged in commodity extraction, production, or trading, such as BHP Billiton, Rio Tinto, Vale.

Advantages:

• Diversify risk and gain from company growth
• Receive dividends as additional income
• Lower entry barriers

Method 4: Commodity CFDs

Participate in commodity price movements via CFD trading platforms without physical delivery.

Core advantages of CFDs:

• Two-way trading: go long or short, respond flexibly to market
• Leverage convenience: control larger positions with less capital, amplify gains
• 24/5 trading: most platforms support round-the-clock trading
• Diverse underlying assets: include not only commodities but also stocks, indices, forex
• No rollover costs: unlike futures, CFD positions can span months or years with minimal overnight interest

Hidden Costs in Commodity Trading

Many beginners focus only on spread profits, neglecting trading costs. Actual profits must deduct the following expenses:

1. Spread Difference between bid and ask prices. For example, gold might have a bid of 1949.02 and an ask of 1949.47, with a spread of 0.45. Profits must exceed the spread to be realized.

2. Swap (Overnight Fee) Fee paid when holding positions overnight past 23:59, compensating for financing costs.

3. Commission Some instruments charge a trading volume-based commission.

Smart traders choose platforms with low fees and small spreads (e.g., those offering demo accounts with virtual funds and zero commissions). Beginners can use demo accounts (usually with 50,000 virtual funds) to familiarize themselves with trading without risk.

Commodity Trading Schedule

Different commodities have varying trading hours, usually depending on the exchange location. Below are the main commodities’ trading sessions based on Thailand time:

(Note: Specific times may vary by platform; always confirm before trading)

Summary: Starting Your Commodity Trading Journey

Commodity Market is a vital investment sector with unique opportunities and challenges. Successful commodity traders should:

1. Choose reputable platforms — ensure a wide range of commodities, quick deposits/withdrawals, transparent fees
2. Understand market mechanisms — grasp supply-demand relationships, policy impacts, and fundamental analysis
3. Manage risks — diversify investments to avoid concentration risk
4. Learn continuously — use demo accounts to gain experience; avoid rushing into live trading

Commodity trading should not be the sole investment focus; it should be part of a balanced portfolio including stocks and bonds. Investors must thoroughly understand the characteristics and risks of various commodities to make informed decisions.