A commodity market is a marketplace where several commodities like spices, crude oil, precious metals, or energy are bought and sold by investors within a country. A commodity is a raw material or agricultural product that is tradeable. Commodity markets provide producers and consumers with access to commodity products in a centralized and liquid marketplace.
Engaging in trading commodities can diversify your asset portfolio. Investors can invest in both perishable and non-perishable products as this will help them face lesser risks and provide boundaries against the growth inflation rate in the country.
Investors can either invest in companies that have exposure to commodities or invest in commodities directly via futures contracts to gain exposure to commodities.
TYPES OF COMMODITIES IN THE MARKET:
Commodities are usually divided into two categories: hard commodities and soft commodities.
Hard Commodities – These are natural resources which are either mined or extracted. The hard commodities are either:
- Metals: Gold, Silver, or Copper
- Energy: Gasoline, Crude Oil, or Natural Gas
Soft Commodities – These are usually agricultural goods or livestock.
- Agricultural products: Rice, Wheat, Salt, or Corn
- Livestock: Egg, Live cattle, or Feeder cattle
PARTICIPANTS OF COMMODITY MARKET:
There are two main participants in the trading commodities market:
1. Speculators – These are the traders in the commodity market who monitor the prices and forecast future price movements. If they expect the price to go up, they buy the commodity contract and sell them as soon as the price goes up. If they expect the price to drop down, they sell their commodity contract and purchase it back as soon as the price drops down. Their primary purpose is to make a big profit in any form of market.
2. Hedgers – They are the manufacturers and producers who use the commodity futures market to reduce risk and protect themselves. A farmer is an example of a hedger. If he expects fluctuations in price during crop harvesting, he can hedge his position and protect himself from risk by entering the futures contract.
ADVANTAGES OF INVESTING IN THE COMMODITY MARKET:
1. Diversification: Several individuals can benefit from the investment of even a minimal percentage of their funds in the commodity market. Even if stock prices have a downward trend, it will help them achieve a high return on investment.
2. Margin trading: Compared to other market dealers, commodity brokers offer a much lower margin in terms of trading. It allows brokers to trade on borrowed funds which profit speculators and hedges in every transaction.
DISADVANTAGES OF INVESTING IN THE COMMODITY MARKET:
1. Limited returns: Unlike other markets, commodity investments only aim to accumulate capital profit. You should be experienced in the commodity market to gain high returns.
2. High risk: The commodity market is highly volatile, and changes in the demand can badly affect the prices. The prices do not remain stable due to extreme volatility. It causes investors to lose high returns.
TOP AUSTRALIAN COMMODITY IMPORTS AND EXPORTS:
Australia is the world’s 13th largest economy. It is also the 24th largest exporter and importer in the world. China, Japan, and the USA are among the top 5 partners of Australia for both import and export.
Australia’s top commodity exports include iron ore, petroleum gas, gold, aluminium oxide, and crude petroleum. Among the top commodity imports of Australia are refined petroleum, crude petroleum, gold, petroleum coke, and zinc ore.