The commodity market functions like a global marketplace where primary goods and raw materials are bought and sold. It is also important for the economy because it enables traders to observe price movements, while producers are able to sell their goods. The UK has a long history of commodity trading, with London being at the heart of many oil, agricultural and metal trading occurring.
What Defines a Commodity Market?
Unlike manufactured products, a commodity market is a financial market where raw materials are traded. These products are of the same quality and value even if produced by different manufacturers.
The Modern Commodity Trading Market
Today, exchanges rely on spot trading, transactions and futures contracts. The prices of today’s commodities are constantly changing as supply and demand shift, alongside being affected by the economic state of a country; and geopolitical events are to be considered too.
How Does the Commodity Trading Market Work?
There are various features that describe the dynamics of commodity markets, from spot and feature markets to exchanges, and more:
Spot Market
The spot market is where commodities are traded for immediate delivery.
Features Market
Features markets include agreements made by traders to buy or sell specific quantities of certain commodities at a set price.
Exchanges
Major exchanges, such as the London Metal Exchange (LME) and ICE Futures Europe, provide platforms for standardised commodity trading.
Over-the-Counter Trading
Deals between a buyer and seller that are made without using a stock exchange or an intermediary are called ‘over-the-counter’ deals.
What Are the Most Common Commodities In The World?
Some of the most traded commodities in the world are energy, agriculture and more:
Energy: Crude oil, natural gas, and coal.
Soft Commodities: Rubber, sugar, and cotton.
Agricultural Products: Wheat, corn, soybeans, coffee and cocoa.
Metals: Gold, silver, copper, and aluminium.
Livestock: Cattle, pork and chicken.
The UK is one of the leaders in trading energy, metals, and agricultural commodities through its trading companies and exchanges.
Commodity Market Requirements
When trading within the commodity market, the following should be taken into consideration:
Compliance
Traders must ensure that they adhere to UK law set by various governing bodies such as the Financial Conduct Authority (FCA). Furthermore, the London Metal Exchange (LME), like many other exchanges, have many rules that govern trading activities.
Market Access
Traders gain entry to commodity markets via trade accounts with brokers or dealers. When traders want to participate in the futures markets they are often required to have margin accounts.
Capital
Commodity trading can be expensive and require large amounts of financial backing because of the risk hedging strategies can put on the trader when utilising future contracts.
Getting ready for positions means gaining a stronger grasp of the market leading up to making moves, which includes watching out for supply chains across the globe and political as well as economic activities.
What Does a Commodity Trader Do?
Commodity traders can buy and sell raw goods with either physical transfer or financial instruments; their responsibilities usually include:
Speculation: guessing price fluctuations for profit
Hedging: Outsmarting price risks with future contracts
Market Analysis: Making trading decisions through inspection of supply and demand
Risk Management: Reducing exposure to high volatility
Logistics and Supply Chain Management: Coordinating the trade and ensuring the quantities and quality of the commodities are delivered on time.
How to Get Into Commodity Trading
If you want to break into the commodity trading sphere, here are a couple of things you can do:
Start Building Your Education and Training Portfolio
Having an academic background in Finance and Economics is a great start, alongside gaining specialised courses on commodity markets may prove useful.
Cultivate Analytical Skills
To properly understand and apply technical analysis, supply chains, and the macroeconomy, it is essential to be proficient across those areas.
Internships and Entry-Level Positions
Working as an intern for trading companies, energy firms or even financial institutions are advantageous when starting your career in commodity trading.
Networking and Industry Events
Going to commodity trading conferences and connecting with people already in the industry is crucial for building your network.
Get on a Reputable Platform
Job boards focusing on finance and trading may offer positions to students or those who have recently graduated.