What Is a Commodity Trader?
A commodity trader is an individual or business that invests in physical substances like oil, gold, or agricultural products. Daily buying and selling are driven by expected economic trends or commodity market opportunities.
Commodity markets typically trade in the primary economic sector and most commodity trading involves the purchase and sale of futures contracts, though physical trading and derivatives trading are also standard.
Oil and gold are two of the most commonly traded commodities, but markets also exist for cotton, wheat, corn, sugar, coffee, cattle, pork bellies, lumber, silver, and other metals.
Key Takeaways
- Commodity traders are individuals or businesses which buy and sell physical commodities such as metals or oil.
- Traders aim to profit from 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 types of traders are active in the commodities market, dealing in raw materials used at the beginning of a production chain. Examples include copper for construction or grains for animal feed.
Some trade independently 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 for a manufacturer or producer aims to secure the best prices on purchases while simultaneously supplying competitive bids to customers. Other commodity traders work solely as broker-dealers like Vitol or Trafigura. Professional traders working for brokerage firms create a deep and liquid international commodities market.
Commodity traders often act as speculators and attempt to make profits on small movements in commodity prices, gaining exposure through futures contracts. These traders go long if they believe prices are moving higher and short the commodity when they expect prices to fall.
Pros and Cons of Commodity Trading
Commodity traders react quickly to market-moving events like natural disasters that can impact various commodity markets at the same time. A hurricane can demolish sugar or orange crops, sending prices up due to a reduced supply. At the same time, lumber prices rise in anticipation of new building and reconstruction costs.
A commodity trader faces limitations compared to traders in other markets as commodity traders generate a total return solely from the price movement of the commodity they are trading. Unlike stock or bond traders, who can earn a dividend or gain from the asset they buy, commodity traders do not receive periodic cash flows. To generate a positive return, the commodity trader must be accurate in anticipating the price direction of the commodity.
Where Does an Investor Trade Commodities?
The most common way to trade commodities is to buy and sell contracts on a futures exchange. Commodity futures and options must be traded through an exchange by persons and firms who are registered with the Commodity Futures Trade Commission CFTC.
Which Commodities are Traded Most?
Crude oil, natural gas, gold, silver, and copper are the top five traded commodities.
What Legislation Regulates Commodity Trading?
The Commodity Exchange Act, passed in 1936, regulates the trading of commodity futures in the United States.
The Bottom Line
Commodities are raw materials including agricultural products, mineral ores, and fossil fuels. On the financial market, commodity traders these physical goods are bought, sold, and traded, distinct from securities such as stocks and bonds.
