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Commodity trading as a business

Advertiser Disclosure Updated: Dec 16,am Investing Basics: Commodities Trading Guide Updated: Dec 16,am David Rodeck Contributor Editorial Note: Forbes may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.

A commodity trader is an individual or business that focuses on investing in physical substances like oil, gold, or agricultural products. The day-to-day buying and selling are often driven by expected economic trends or arbitrage opportunities in the commodities reviews about the trading robot. Commodity markets typically trade in the primary economic sector, including industries focused on collecting natural resources commodity trading as a business profit.

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Most commodity trading involves the purchase and sale of futures contracts, though physical trading and derivatives trading are also common. Oil and gold are two of the most commonly traded commodities, but markets also exist for cotton, wheat, corn, sugar, coffee, cattle, pork bellieslumber, silver, and other metals.

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Key Takeaways Commodity traders are individuals or businesses which buy and sell physical commodities such as metals or oil. Traders in this area aim to profit off of anticipated trends as well as arbitrage opportunities.

Commodity traders may work to secure a supply of raw material for a business or industry, to help to create liquidity in an international market, or to invest in a speculative capacity.

Understanding Commodity Traders Several different types of traders are active in the commodities market.

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Often these traders are dealing in raw materials used at the beginning of the production chain. Examples include copper for construction or grains for animal feed.

Commodity Trader

Some operate independently, trading on major exchanges such as the New York Mercantile Exchange, and others work for international oil companies, mining companies, or other large commodity producers. A commodity trader working for a manufacturer or producer wants to secure the best prices on purchases while simultaneously supplying competitive bids to customers.

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Still other commodity traders work solely as broker-dealers like Vitol or Trafigura. Professional traders working for brokerage firms help in creating a deep and liquid international commodities market.

The Bottom Line Commodities are an important aspect of most American's daily life.

Commodity traders sometimes act as speculators and attempt to make profits on small movements in commodity prices. These commodity trading as a business traders do not really need the specific asset they are trading and rarely take delivery, but seek to gain exposure through forward and futures contracts.

Commodities Trading: An Overview

They go long if they believe prices are moving higher and short the commodity when they expect prices to fall. Examples include natural disasters that can impact different commodity markets at the same time.

But over the years, the number of commodity trading houses has dwindled, and the institutional, pure-play commodity hedge funds that remain, and actually make money, can be counted on two hands. Amid the mayhem, banks held tightly to their commodity desks in the belief that there was money to be made in this dynamic sector.

A hurricane can wipe out sugar or orange crops, sending these prices up on reduced supply. At the same time, lumber prices shoot up in anticipation of new building and reconstruction costs. Commodity traders need to be fast enough to react to such quick developments in order to trade profitably.

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Slow reactions can result in hefty losses if the market takes a quick turn in the wrong direction. The Downside of Commodity Trading A commodity trader faces certain limitations compared to traders in other markets For example, commodity traders generate a total return solely from the price movement of the commodity they are trading.

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Unlike stock or bond traders, who can earn a dividend or interest payment from the asset they buy, commodity traders do not receive such periodic cash flows.

This means that, in order to generate a positive return, the commodity trader must be accurate in anticipating the price direction of the commodity. Compare Accounts.