Gone are the days when commodities trading was regarded as a crude way to earn profits. Commodities trading is a much more integral aspect of the supply chain of raw materials today and has meaning for investors and manufacturers, as well as the all-important suppliers. Via the acquisition and selling of any assets of a physical nature, commodity traders have become a significant part of value chains. Nowadays, with the evolution of commodities markets, several independent houses of trading own storage facilities, fields, refineries, port terminals, and more important infrastructure to ensure a seamless supply of goods on an international scale.
The common raw materials that are used to ultimately manufacture finished products are called commodities. Examples of commodities are metals like gold, natural gas, crude oil, wheat, etc. Just as you trade in stocks in stock markets and open a demat account to do so, you can trade in commodities markets as well. Commodities trading simply involves the trading of commodities. You can trade in companies that are involved in the supply of commodities by buying stocks, or trade in commodity futures contracts with any commodity as the underlying asset.
Commodities trading has existed since civilization. The commodities markets have been through everything from global wars to international financial crises, and recently a massive health crisis and the Ukraine-Russia clash. The roots of trading in commodities goes back to 4000 BC with the Sumerian civilization (Iraq today). In the early trading days, civilizations used to trade in cattle, metals, grains, etc. In the 19th century, the Chicago Board of Trade marked a milestone in the long history to do with trading in commodities. Currently, with technology taking over all walks of life, online commodity trading is extremely popular. The largest commodities exchange markets on a global level are the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMEX), the London Metals Exchange (LME), the European Energy Exchange (EEE), and the Shanghai Futures Exchange (SHFE).
The early days of trading in commodities involved Pit Trading. Here, traders which constituted both buyers and sellers, placed orders with brokers on trading floors of exchanges. Messages for buy and sell orders passed through a number of hands like brokers and desk clerks. This was a physical transaction and required time and effort. Now, things are a lot different. If you can invest in an upcoming IPO online, then commodities trading online is a breeze too. Electronic commodity trading is the current trend and traders simply fill out orders online on a trading platform on their smartphones or other devices. The exchanges match buyers and sellers in an automotive fashion. Trading takes place in mere seconds with low costs.
In the years spanning the 1900s, commodity traders primarily involved themselves with trades that were speculative, and made the most of opportunities in arbitrage. These enabled them to make good returns. Now, trading firms play an integral role in supply chains. The huge advantage that commodity trading companies have is the knowledge of trading and the acquisition of physical assets. If the commodity firms own the supply of commodities, they can dictate prices and take good positions in the markets. With online commodity trading, this gives firms and traders an edge to make the most of opportunities.
In 2019, a report by UNCTAD (United Nations Conference on Trade & Development) stated that 102 out of 189 of the world’s nations and two-thirds of emerging markets were reliant on commodities. Consequently, international houses of commodities like Vitol, Glencore, Koch Group, and the like gained importance as supply firms of commodities. They can dictate pricing and ensure commodity flows.
If you want to seriously widen the scope of your portfolio, don’t just open a demat account to trade and invest in stocks, or subscribe to any upcoming IPO. You should actively partake in commodities markets to profit more.
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