What are commodities and how to trade for beginner investors

Currently, interest in investment is increasing, especially in commodities trading, which is an attractive investment channel for those looking to diversify their portfolios. This article will explain in detail about commodities: their origins, types, and suitable trading methods for beginners.

What are Commodities? The Role of Commodities in the Financial Market

Commodity (Commodity) refers to raw materials or natural resources with high value, used in manufacturing other products or consumed directly in daily life, such as gold, copper, crude oil, natural gas, wheat, coffee beans, and sugar.

Commodities can be divided into two main groups based on their origin and usage:

Hard Commodities and Soft Commodities

Soft Commodities (Soft Commodities) are products from agriculture and livestock, including:

• Agricultural sector: coffee beans, cocoa beans, oranges, sugar, cotton
• Livestock sector: pork, cattle, and other livestock

Hard Commodities (Hard Commodities) are derived from mining or extraction from natural sources, including:

• Energy sector: crude oil, natural gas
• Metals group: gold, silver, copper, platinum, palladium

Commodities that are widely traded

In the financial market, popular commodities are traded using symbols such as:

• XAUUSD (Gold) and XAGUSD (Silver)
• UKOIL (Brent Crude Oil) and NATGAS (Natural Gas)
• COPPER (Copper) and XPTUSD (Platinum)
• COFFEE (Coffee) and SUGAR (Sugar)

Factors Influencing Commodity Price Movements

Demand Factors (

Rising income levels and population growth are key drivers. In low-income countries, increased income often leads to higher food expenditure, while high-income countries shift consumption patterns toward other goods.

Consumption behavior and age demographics also affect demand for different types of commodities. The trend of increased meat and animal product consumption is observed in developing countries.

) Supply Factors ###

Production depends on various factors such as labor, capital, land, water sources, and natural resources. Improving production efficiency requires investment in research and development.

( Uncertainties )

Climate factors and atmospheric conditions, such as droughts and floods, directly impact agricultural harvests.

Market Feedback Loops (

Investment and speculation in commodity futures markets create feedback loops that can amplify price volatility. When prices rise, additional investors buy in, further driving prices higher.

Advantages and Disadvantages of Trading Commodities

) Key Advantages ###

1. Hedge Against Inflation Commodities like gold, silver, and oil tend to increase in value alongside inflation.

2. Diversification Commodities have low correlation with other assets like stocks and bonds, helping to reduce overall portfolio volatility.

3. Liquidity Commodity prices often move inversely to bonds, protecting portfolios and increasing investment liquidity.

4. High Return Opportunities During economic instability, commodity prices can change rapidly due to supply and demand imbalances.

( Disadvantages to Consider )

1. Leverage Risks Using high leverage allows for smaller investments but increases the risk of rapid losses.

2. High Market Volatility Studies show commodities are twice as volatile as stocks and four times more volatile than bonds. Rapid price movements can lead to poor decision-making.

3. Inverse Relationship with Bonds Generally, profits from commodities occur when bond markets are volatile.

4. Environmental Impact In the context of global warming and stricter environmental policies, mining, agriculture, and energy extraction may face new restrictions.

How Beginners Can Trade Commodities

1. Commodity ETFs

Invest in commodities without owning the physical asset. Most ETFs invest in derivatives or futures contracts.

Advantages:

• Can start with small amounts
• Easily traded online during market hours
• No need to worry about storage or loss risks

2. Commodity Futures

Contracts to buy or sell at a set price today, with delivery in the future. Commonly used for gold, oil, and other major commodities.

Advantages:

• Profit from price increases or decreases
• Require less capital than direct purchase, using ###Margin###

( 3. Commodity Company Stocks

Invest in shares of companies involved in raw material production or trading, such as BHP Group, Rio Tinto, Vale SA, etc.

Advantages:

• Diversify investment portfolios
• Hedge against inflation in the long term

) 4. CFD Trading on Commodities

Online trading via brokers without physical delivery. Positions are valued according to real-time commodity prices.

Advantages:

• Profit in both rising and falling markets
• Use leverage instead of full capital
• Open positions anytime and hold across months or years without rollover of futures contracts
• Wide range of tradable assets, including foreign stocks, indices, and other instruments

Costs Associated with Trading

When trading commodities, profits are not just the price difference but must account for transaction costs, which mainly include:

1. Spread ###Spread### The difference between bid and ask prices. For example, gold bid at 1949.02 and ask at 1949.47, with a spread of 0.45 dollars. To profit, you need to cover this margin.

2. Swap Overnight holding fee, charged at 23:59.

3. Commission Some instruments charge a fee for opening and closing trades.

Therefore, to calculate true profit, all transaction costs must be deducted from the gross gain, and these costs should be carefully considered before trading any commodity.

Commodity Trading Schedule

Not all commodities are tradable at all times. Trading hours depend on region and the nature of the commodity:

Precious Metals (Gold, Silver, Platinum, Palladium):

• Monday: 06:00 - 24:00 (Thai time)
• Tuesday to Friday: 00:00 - 24:00
• Saturday: 06:00 - 05:00 (Next day)
• Closed on Sunday

Crude Oil and Energy (Brent, WTI, Natural Gas):

• Monday: 06:00 - 24:00
• Tuesday to Friday: 00:00 - 24:00
• Closed on Saturday-Sunday

Agricultural Products (Coffee, Sugar):

• Monday: 16:15 - 24:00
• Tuesday to Friday: 00:00 - 24:00
• Closing times vary: 01:30 - 01:00 (Thai time)

Investors should check the trading schedule with their broker to confirm trading hours.

Summary and Recommendations for Investors

Commodities are an important part of a diversified investment portfolio. Despite high volatility, they offer growth opportunities and serve as a hedge when the economy is uncertain.

When starting to trade, investors should:

1. Choose a reputable broker with expertise in various markets, fast deposits/withdrawals, and competitive fees.

2. Avoid concentrating investments in a single asset to reduce overall portfolio risk.

3. Study the specific risks associated with each asset before investing.

4. Remember that commodities are not suitable as a primary investment due to their high volatility; they should be used as a portfolio supplement only.

Investing in commodities requires deep understanding, risk management, and informed decision-making to turn trading into a long-term value creation channel.