Reasons Why People Trade In Commodities

Reasons Why People Trade In Commodities

Commodities are a raw material or basic goods in commerce which the institutions or individuals sell and buy. Commodities are considered as the building blocks for much more complex services and goods. What differentiates commodities from other kinds of goods is that these products are interchangeable with other products and are standardized.  This means that the same commodity with 2 equivalent units must have a uniform price in any part of the world.

The commodities are generally extracted, produced, grown and traded in huge quantities to support the global trading markets. This market is totally different from the cryptocurrency market wherein there is no physical transaction of the currencies takes place. You can learn more about this market by reading the crypto soft review.

Main commodities traded in the market

The commodities are mainly divided into 4 categories:

Energy- The products under this category include gasoline, natural gas, crude oil, coal, heating oil, ethanol, uranium, and electricity.

Agricultural products- The products under agricultural are food crops such as soybeans, cotton, corn, etc, industrial crops like rubber, wool, lumber, etc and livestock such as pork bellies, cattle, hogs, etc.

Metals – Under this category, base metals like nickel, steel, aluminum, tin, zinc, iron ore, etc and the precious metals like silver, platinum, gold, palladium, etc are traded.

Environmental- The products like renewable energy, carbon emissions, etc come under this category.

Why do people choose to trade in commodities?

There are various reasons why people choose to trade in the commodities. The major reasons are:

Population growth- An increase in the population of the world and the shifts in demographic creates investment opportunities in different commodity classes. The growth in population creates a higher demand for energy commodities. Economic growth and urbanization to create demand for varied commodities.

Portfolio diversification- Most of the traders and investors have the majority of the assets invested in bonds, currencies, and stocks. Commodities help the traders in diversifying and lowering the overall portfolio risk.

Inflation hedge- One way to protect yourself from inflation is investing in commodities. All the commodities would become very much expensive when inflation strikes.  The monetary policies that are overly accommodative from the largest central banks of the world have been able to keep the global rate of interest low and have created speculation in different asset classes. Some point or other it would show up in the commodity market. It can lead to inflation and create higher commodity price.