Commodity Trading - Understanding it the Easy Way

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A popular new term in the investment market these days is commodities.
But commodity trading is nothing new.
In fact, commodity trading was recorded as early as in ancient China, where the imperial court would buy rice that has yet to be harvested from farmers to encourage farming and stabilize food prices.
Commodities refer to a whole group of goods such as foodstuff, metals or even fuel.
In general, commodities are natural resources extracted from the Earth and are consumed by human activity.
The prices of these commodities follow the basic principle of supply and demand.
Supply comes mainly from mining and farming, and to a lesser extent, recycling for reusable materials.
Demand is of course the consumption by human society.
The main channels to trade in commodities involve holding the actual goods in hand, trading in mining stocks or trading directly in commodity futures.
Holding actual goods in hand can be quite problematic.
First you need a secure storage area to keep them, and you will need manpower to handle the physical goods.
If the commodity has a shelf life, such as food commodities, storing them can be a headache too.
Unless you're e a trader who trades those commodities in the magnitude of tonnes, you're better off trading commodities via other channels.
Mining stocks are a good venue for diversifying your exposure in the commodities market.
Prices of commodities are dependent on supply and demand, but mining stocks can become profitable even when prices of commodities do not go up.
Lowering of production costs of the commodity can increase profits without having the prices actually changing.
This commonly happens in a recession when there is over supply of labour and production costs go down.
While commodity prices tend to go down during a recession, this occurs in conjunction with lowering production costs and this makes mining stock somewhat more recession resistant than normal stocks.
Trading in commodity futures is simply predicting the future prices of yet to be produced or mined commodities and paying a price to book them.
Unlike physical ownership, there is no real inventory involved in futures.
All you invest in is the ownership of future produce, and you can sell that ownership.
Trading in futures and physical ownership is simply a buy low sell high game of numbers, there is no real growth of the industry.
But of course, trading improves market liquidity and results in a fairer trading environment.
Investing in mining stocks is about using your money to grow a real business that creates more value; in this respect, investing in stocks in healthier for the economy than simply trading in futures.
However, when investing in mining stocks, you have no real influence over management decisions and industrial practice changes; therefore there is less control of your investment than futures where you buy or sell based on your choices.
Today's investor should learn to diversify their investments into a whole range of products to minimise their exposure of risks in the economy.
Even during a recession there are some products that go up; Gold, a form of commodity is one of them.
The intelligent investor should proportional his investment in different products based on the wider economic wide to tap into the best opportunities while minimising his risks.
Commodities is one such product that one should take time to invest in.
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