Commodities form the foundation of world trade. They are raw materials or products which can be a product by itself or can be a source for other products. Thus, commodity covers a plethora of goods/products that can be agricultural (like wheat or soybeans), natural (like crude oil and minerals) animal ( like wool, meat), and also man-made like steel.
What are the advantages of trading commodities?
- There is almost no relation between commodities and other trading assets so trading in commodities can serve as an effective diversification to your trading portfolio.
- Commodities are always in demand and are least affected by uncertainties and turbulences in the market. Moreover, the value of commodities is independent of the value of currencies. So, when other assets might be losing value, commodities often retain theirs.
- Commodities often suffer wild price swings. CFD traders living on speculations can profit from these drastic price movements.
Which commodities to trade-in?
Consider the liquidity of a commodity or the ease of buying and selling that commodity while selecting one for trading. Look for better than average trading activity and increased demand and supply to find how liquid is the market for a commodity. A more liquid market is generally less risky for the trader as there is less slippage. More liquid commodities also see less drastic price swings.
What are the topmost traded commodities?
The topmost treaded commodities include the sectors of energy, agricultural products, and minerals.
1. Crude oil –
Crude oil is the most important commodity to cater to the energy market worldwide. The most important derivatives are fuels and other chemicals. The two important forms of crude traded worldwide are –
- WTI Crude Oil – West Texas Intermediate crude oil is a grade of crude oil values for its low density and low sulfur content. It is also known as Texas light sweet.
- Brent Crude Oil – Brent Crude oil is used as a benchmark for oil pricing across the globe. It is a low-density crude that is extracted in the North Sea and has a low sulfur content.
2. Natural Gas –
Natural Gas is the next most important non-renewable energy used for many purposes like cooking, heating, electricity generation, and also as vehicle fuel. The clean nature of this fuel is increasingly attracting more users.
3. Agricultural products –
They are the next most important commodity after energy needs. The most important agricultural products are –
- Coffee – it is estimated that worldwide people consume around 2.25 billion cups of coffee every day. The top coffee-producing countries are – Brazil, Vietnam, Colombia, Indonesia, and Ethiopia.
- Soybeans – it is one of the most active agriculture commodities. The US has a share of 44% of the total soybean export in the world.
- Other major agricultural products include Cotton, Cocoa, Corn, Sugar and Wheat
4. Precious Metals –
- Gold – Apart from its value as ornaments gold is also seen as a safe investment for the future. The precious metal is also used in the electronic industry.
- Silver – It is also a safe investment though its value is much less than gold. Silver however finds more use in electronic, imaging, and alternative energy industries.
5. Metals in manufacturing industries –
These metals form the backbone of industry and development. Though they are found more commonly, their value lies in the use in our everyday lives.
- Copper – Being a good conductor of electricity, this metal is extensively used in the electronics and power sector. The main producers of copper are China, Chile, and Peru.
- Iron – This metal forms the backbone of all infrastructure and machinery. Iron is valued both in the raw ore form and steel.
- Other metals important for the manufacturing process worldwide are aluminum, manganese, tin, etc. They are important both in the native form and also to make alloys of different nature.
While it is relatively safe to trade in commodities, you should keep in mind that the price of the commodities is influenced easily. Geopolitical factors affect the production and pricing of natural products. An economic slowdown can affect the import of precious metals and hence cause a drop in the price. Similarly, in times of economic uncertainty, their price can increase as a safe investment. You must do your research and analysis according to your goals before you start trading in commodities.
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