Commodity trading is one of the oldest types of trading, which very likely predates the financial markets. However, when it comes to trading commodities in organized exchanges, one of the first recorded examples dates back to Amsterdam in 1530.
In other words, exchange-based commodity trading is at least 500 years old.
Now, when it comes to commodity trading in New Zealand, it saw quite a significant increase in popularity in recent years. With that in mind, let's see what commodity trading really is, how it works, and what are the most popular commodities in NZ.
What are commodities?
When it comes to commodity trading, it is different from stock trading, with which most people are familiar with. It doesn't include company shares, but rather certain items and resources that are in demand and have value. They also need to be mass-produced by multiple suppliers and have consistently good quality.
This can include anything from oil and gas to precious metals such as gold and silver, and even things that are known as soft commodities, like wheat, cocoa, coffee, sugar, and more.
These are all some of the most popular and most common commodities that people choose to trade-in. However, even commodities do not have fixed prices and their value changes based on supply and demand.
The rules are rather straightforward when it comes to the prices — a surge in demand causes the prices of commodities to grow accordingly, while the increase of supply, or a drop in demand, causes the opposite.
As for where they are traded, commodities can be found in the commodity market.
What are commodity markets?
Simply put, commodity markets are places where commodities — primary or raw products — can be exchanged.
Over the last several decades, with the rise of internet trading and investing, the commodity market became almost completely paperless.
Meanwhile, you get to choose between two categories of commodities that you may wish to trade in:
- Soft commodities
- Hard commodities
Soft commodities include things such as corn, sugar, coffee, pork, and even livestock. On the other hand, hard commodities include natural resources such as oil, gold, gas, silver, rubber, and alike.
However, it doesn't really matter which of the two you might go for, or even if you go for both. Both are equally popular, and it all comes down to your personal preference as a trader.
What are the most popular commodities in New Zealand?
While the internet has made commodity trading borderless, and your options are pretty much completely open for anything you may wish to trade, there are still some local commodities in New Zealand that are worth considering.
This includes the country's main exports, such as cheese, logs, milk powder, butter, wood, meat, as well as crude oil.
Trading commodities in New Zealand is pretty easy to get into when compared to some other types of trading, As a result, online trading of commodities is spreading rather fast throughout the country. It is convenient, and your online broker will be able to provide you with all the real-time quotes, charts, news, technical indicators, and more.
All in all, you should not have a problem with making an educated trading decision at any time, although this still requires research and familiarity with the markets.
For example, if you go for a specific commodity or two, you need to know pretty much everything that surrounds it in order to make the best trading moves. You need to keep track of charts, compare them, and study the past behavior of commodities you are interested in.
You should also keep track of any news related to your commodity of choice, and do deep research. Do not simply rely on rumors, as this can easily lead you to a wrong move.
How to start trading commodities
As mentioned, it is relatively easy to get into trading of commodities, and all you really need to start with is to choose a commodity you wish to trade. You should start by checking out different markets, and see which one you might be the most interested in, based on your preferences, the prices, volatility, popularity, and alike.
After that, you should decide whether to buy or to sell. Buying is a recommended course of action if you believe that your commodity or commodities of choice will soon see a price increase. In the trading world, this is referred to as 'going long.'
Alternatively, you can 'go short.' or sell a commodity, if you expect that its price will go down in the near future.
However, you must also remember to manage your risks, as making a wrong move will, in fact, lead to losses. Fortunately, there are ways of securing yourself, so that your losses would not be as big in the worst-case scenario.
There is a wide range of stop-loss orders for you to choose from, such as GSLOs (Guaranteed Stop-Loss Orders). These work the same as your typical stop-loss orders, except you can pay for a guarantee that your order will be closed if the market volatility causes the price to move in a way that would be particularly damaging to your trade.
And, if the GSLO is not triggered, your premium will be refunded in full.
Other than that, remember to keep a close eye on your position after placing the trade. Follow your profits or losses in real-time, and keep in mind that losses can, in fact, get bigger than your deposits.
Lastly, if your trade doesn't get automatically closed as a result of a stop, or if the take profit order is not being triggered, remember to close it yourself when you decide it is the right time.
Things to keep in mind when trading commodities
As always, there are some additional things to keep in mind when trading, which also applies to commodities.
One of the first ones is something that cannot be stressed enough, and that is the need to do your research. A lot of novice traders tend to skip this part and go in blind, which rarely has good consequences.
Knowledge is the key, and knowing what you are doing and what to expect is bound to make you a successful trader, just like the lack of knowledge and awareness will lead to losses, except if you are exceptionally lucky.
As your knowledge of trading commodities and their performance increases, you will be able to develop your own trading strategies. That way, you will come in with a plan, which will, hopefully, be good enough to make you profits despite the unpredictability of the markets.
However, you also need to keep in mind that, once you come up with a plan, you also need to stick to it. That means that you need to have the discipline to overrule emotional reactions to new developments.
This is another pitfall that many fail to escape, as they make a mistake of either risking too much or reacting to even the slightest market changes. This is often caused either by greed, or the fear of losses. However, such behavior can only hasten the loss that a trader is dreading, rather than avoid it. Remember to always keep calm and force yourself to react according to logic.
Losses are an essential part of trading, whether commodities, stocks or anything else. In other words, you are bound to experience them from time to time. By keeping calm, you can ensure that you will see fewer losses and more profits, but that requires discipline, which is usually the hardest part of trading.
Commodity trading in New Zealand is a great way to make a profit, and it is rather easy to get into. That, however, doesn't mean that it is completely effortless, and you must still do proper research in order to succeed.
But, it is popular, it can be profitable, and it is very simple to start. After that, it all depends on your discipline, dedication, as well as the choice of a commodity.
Author: Ali Raza - A journalist, with experience in web journalism and marketing. Ali holds a master's degree in finance and writes extensively about the financial markets and fin-tech industries.