How to invest in the commodity market? Basic Tools

Since storing money is not efficient and inflation can offset your savings, most people come to think of investments that will not only save but also multiply their own capital. If you are interested in investing in financial markets, the first thing you will probably look at is the commodities market. It offers a variety of commodities, such as oil, gas, wheat, meat, and gold. Typically, the commodity exchange is chosen by businesses and huge companies to purchase the products they need for their business. However, private investors also use exchanges to make money on the difference in buying and selling prices.

How does it work? In a commodity exchange, prices depend on supply and demand. Buyers do not select products by visually inspecting them, but enter into purchase orders if the product suits their characteristics. To reduce the risks of such transactions, contracts are concluded according to certain rules, which are controlled by the exchange itself.

Standard characteristics of each contract:

• Quantity - the commodity is measured in kg, pounds, liters, barrels, and tons.
• Quality - the index defines the purity of the raw material, the percentage of additives, and so on.
• Price - the price at which the product is bought or sold.
• Delivery - the date, place, and method of delivery are determined. But contracts are more often concluded not physically, but financially.

In order not to buy raw materials directly, and to avoid such difficulties as delivery, storage, and subsequent sale of the product, investors use the following instruments which simplify trading at commodity markets.

The commodity market on the exchange is represented by a variety of investment instruments.

The main ones are:

1. 
   Futures contracts, allow buyers and sellers to fix the price of a commodity at a certain date in the future, which helps manage price risks. That is, if the price rises on the end date, the trader sells the futures contract at a profit. But if the price falls, the trader loses.
2. 
   Options are financial instruments that give traders the right, but not the obligation, to buy or sell a commodity at a predetermined price. Futures contracts are taken as the underlying asset. If the price of the commodity on the expiration date of the option is close to the strike price, then you make a profit. Otherwise, you lose the investment you made in buying the option.
3. 
   Exchange Traded Funds (ETFs) are investment instruments that allow traders to buy and sell shares of a fund that tracks the price of a metal. The tool is suitable for traders who are looking to expand their market presence. ETF funds can buy futures contracts or invest in stocks, providing diversification of assets, as it would take a lot of time, effort, and money to acquire these assets on your own. That said, it's important to build in the risks that ETFs charge management fees and may not provide the same returns as the asset itself.
4. 
   CFD (Contract for Difference) makes it possible for a trader to profit from the market trend change, as well as from price ups and downs, without owning the product. Basically, it is a contract between a trader and a broker where at the end of the deal the parties make up the difference in the price of the product at the beginning of the contract and at the end of it.
5. 
   Equity trading can be an alternative to other types of commodity trading. With it, you operate on shares of companies that operate in a particular sector. This allows you to invest, for example, in the stock of an oil producer. It's important to note that proper management and company strategy can outweigh falling commodity prices, so often such investments reduce your trading risks.

Whichever instrument you use, it is important to be aware of the risks involved. Do not enter into a transaction with an amount you are not prepared to lose, follow the rules of risk management and competent trading.

Also, if you want to use all available trading tools to increase your capital as soon as possible - follow this link below, or contact us via live chat. Our experts will help you to choose the best strategy for success.