Risk Factors of Commodities Trading

A commodity market is simply a market which trades in the main economic sector instead of specific manufactured goods, for example, sugar, cocoa and milk. Soft commodities are generally mined, including oil and gold. More recently, financial institutions have begun to trade in financial futures contracts as well.

Financial futures involve borrowing funds and therefore come with some operational risks, but the major issue is that they carry a relatively low risk compared to other forms of trading. The liquidity factor means that they are readily traded and therefore you can buy or sell without waiting for a long period of time. In addition, there is also very low margin requirements. These factors make financial markets attractive to both institutional and individual traders. However, there are also certain operational risks involved in commodity markets which have to be considered.

One of the key issues with commodity markets is speculators. Speculators are typically major holders of currencies and thus are major buyers in the markets. Speculators buy a commodity because it goes up in value. They then hope that the price will go higher still further and sell it for a profit before it reaches its original price. These activities cause significant volatility in the commodity markets.

A third risk associated with the commodity markets relates to the ownership of exchange-traded funds (ETFs). ETFs represent a basket of securities that trade on the same exchange. Investors usually buy ETFs which have a large weighting in one particular industry or index. When the basket is made up of numerous industries or indexes, the volatility of the market is reduced due to competition among these ETFs. Most index funds that trade on the commodity markets are usually managed by professional traders or investment management firms, and therefore most of them are traded on major exchanges.

Liquidity: The liquidity of the commodity markets is an important factor when it comes to choosing the right type of investment. The commodities that are traded on the commodity markets tend to be very liquid. Investors can buy and sell commodities very quickly, but since the prices are relatively low when they are bought, sellers take advantage of this situation by offering incentives for sellers such as insurance, commissions, and other perks. This means that commodities with relatively low liquidity tend to be less liquid and are not appealing to most investors.

Geography: Although the commodity markets do not feature a wide variety of destinations, they do generally center around four areas: North America, South America, Africa, and Europe. Developed countries such as the United States, Canada, and South America are generally considered to be the centers of the global economy. Developed countries that include corn as a major export are also located near the centers of these four continents.