Forex commodities analysis

Commodities or futures is a goldmine for investors and has traditionally attracted a lot of interest from people of all works of life. Commodities involved a whole range of items which are the powerhouse of the global economy like steel, crude oil and gold

WHO TRADES COMMODITIES

Traditionally, traders are divided into two main categories or traders, hedgers and speculators. Hedgers use the futures or commodities market to manage price risk. Speculators on the in another breathe accept that risk in an attempt to profit from favorable price movements. While futures or commodities help hedgers direct their risk exposure to price risk, the market would not be really possible without the participation of speculators. With the speculators activities in the market, there is good liquidity, enough to allow the hedgers carry out their trade activities efficiently. Some speculators may be full-time professional traders or individuals who occasionally trade to supplement a regular job. For some, their trading strategy demands that they hold a position for as long as months, while some others only take part in short term trades. Regardless of their approach or method, each market participant plays an important role in making the futures market an efficient place to conduct business for everyone. The most common types of market participants in the commodities markets are given below;

HEDGERS

Hedgers use futures to reduce or limit the risk associated with a possible adverse price change in the future. Producers, such as farmers, most times sell futures on the crops they raise to hedge against a drop in commodity prices which is a possibility. This makes it easier for these producers to do long-term planning and profit forecasting. In the same way, manufacturers such as food processing plants often buy futures to secure their input costs at a fixed price. This allows them to base their business planning on a fixed cost for core ingredients, such as corn and wheat and not open ended figures based on rise of fall of ingredients. Some other common examples include: airlines hedging fuel costs or jewelry makers hedging the cost of gold, silver and precious stones. This makes it easier for these companies to manage price risk and stabilize the cost passed on to the end-user and in the long run, price can be predictable and stable.

INDIVIDUAL TRADERS

Many speculators are people trading their own money as an individual trader or investor. They trade as they deem fit in a bid to get some returns from their activities. Electronic trading has been a boost helped to level the playing field for the individual trader by increasing their access to price and trade information. The speed and ease of trade execution, united with the application of modern risk management, provide the individual trader access to markets and platforms that were once only reserved for institutions.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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