Commodities Trading Vs Forex Trading
What Are The Main Differences?
As more and more people look to find ways to make their money grow, many are turning to commodities trading and foreign exchange trading, also known as Forex. Due to financial markets around the world becoming more closely connected due to the globalisation of advanced business technology, traders in both of these areas are finding success. However, for those who are just beginning their trading adventures and need additional information, the fact is there are many differences between trading commodities and foreign currency.
What is Forex Trading
Also known as FX trading, currency trading or foreign exchange trading is when one speculates on different currency pairs in the foreign exchange markets with the aim of turning their investment into a profit.
Trading is done by buying one currency and selling another at the same time. So for example traders might trade AUS USD. In this case AUS and sell USD. AUS is known as the base currency (the first currency and currency being bought) while USD is known as the quote currency which is the currency being sold.
What is Commodities Trading
Is a type of asset class or investment where one purchases and trades items that are grown or produced in the environment naturally. These items are usually basic items necessary for everyday life and would typically fall into one of 4 categories, livestock, metals, energy and agricultural. Investors trade commodities on exchanges with the goal of taking advantage of fluctuations in value of a particular commodity to generate a profit.
Some of the major commodity exchanges include
Chicago Mercantile Exchange: Meats
Chicago Board of Trade: Grains, Ethanol, Metals
New York Mercantile Exchange: Energy, Precious Metals, Industrial Metals
London Metal Exchange: Industrial Metals
Australian Securities Exchange: Agricultural, Energy.
Types of Commodities
There are 4 basic types of commodities. Each covering a range of specific commodities.
Hard Commodities: These include commodities that have to be mined and extracted
- Metal commodities:
- Precious Metals: These are naturally occurring metallic elements such as gold, silver, palladium and platinum
- Base Metals: These are non-ferrous metals widely used in industrial and also commercial applications. These include aluminium, copper, iron, lead, nickel, steel, tin and zinc
- Fossil Fuel commodities: These include
- Gas: natural gas, gasoline
- Oil: Crude Oil, Brent Oil, Heating Oil
- Fossil Fuel commodities: These include
Soft Commodities: These include commodities that are grown
- Livestock and Meat commodities: Domesticated animals raised for commodities
- Live Cattle (to produce food and goods): Pork, Beef, Goat, Horse to produce eggs, leather, milk
- Feeder Cattle (for consumption): Pork, Beef, Fish, Goat, Lamb
- Agricultural commodities – grown goods
- Consumption – wheat, grains, eggs, soybeans, peanuts, sugar, cocao, coffee, corn, oats, orange juice, rice
- Material – lumber, cotton, wool
Lack of Inside Information
One of the biggest differences between these two forms of trading involves the amount of inside information that may be available. In commodities trading, information about various markets is considered a closely guarded secret, with one trader after another vying for any tip they can find in hopes of striking it rich with a big deal. Therefore, traders will often attempt to uncover little-known facts and figures about certain commodities markets from those in the know, thus gaining access to inside information that may prove useful. However, forex trading is a far different arena. Very little if any inside information is involved in forex trading, since currency exchange rates are easily accessed through numerous sources online on a daily basis. Though fluctuations in these exchange rates come and go at a rapid pace at times, traders easily have access to real-time information.
Always Open for Business
Another difference between commodities trading and forex trading is the ability to conduct business whenever and wherever a trader wishes. In forex trading, the market is open 24/7 since the United States, European, and Asian markets all have different closing times. For this reason the forex market is known as over-the-country (OTC), trading can happen at all hours as there as the forex market has no central location. Trading instead, takes place through a global network of banks. Thus, immediate transactions can be made based on breaking news or any other events that may be happening at anytime around the world. However, commodities trading is conducted only during certain market hours, which makes instant trade executions unlikely in most circumstances.
A Liquid Market
One of most striking differences between forex trading and commodities trading is the liquidity of the markets themselves. The forex market, considered the largest financial market in the world, has a trading volume in the trillions daily, while the commodities market is in the billions. While both are nevertheless very large markets, the forex market is so large in part due to the over-the-counter nature of the trading. Commodities trading, always done on an exchange that relies on central counter party clearing, has no aspects of over-the-counter trading within its market.
Costs and Fees
While all trading has some costs and fees associated with it, commodities trading and forex trading have some stark contrasts. For example, the commodities market relies heavily on commissions, along with numerous trading fees, middleman fees, and ticket costs. The forex market, while also having costs associated with its trading, does not rely on commissions for its brokers. Instead, its costs are built in to the bid/ask spread, helping traders keep more of their money while also ensuring trading stays on a level playing field for everyone. Because brokers in commodities trading are paid on a commission basis, some experts argue they may not always have the best interests of their clients at the forefront. However, in most cases this is not the case.
The Risk Factor
While all trading has some level of risk, there are those who feel the forex market may be a bit riskier than traditional commodities trading. This is due to the extremely small fluctuations in exchange rates that can produce trading success or failure in a short period of time. Because forex trading is not done on a regulated exchange, traders should always proceed with caution and take advantage of the many educational tools that are always present on forex sites.
As most forex traders would agree, one of the biggest benefits of forex trading is the numerous companies from which to choose. Offering 24/7 support, numerous educational information for new and experienced traders, and demo accounts to let new traders practice without fear of losing hundreds or thousands of dollars of their own money initially, forex companies are known for being very user-friendly and interactive. Some of the most popular forex companies traders use include Pepperstone, IG, and CMC Markets, all of which have gained excellent reputations worldwide for their knowledge, experience, and customer satisfaction. What makes these companies very popular with traders around the globe is the ability to trade not only forex, but also energy and precious metals among many other markets. Using trading platforms such as Metatrader 4 and Metatrader 5, these companies also allow their traders to conduct business using mobile devices such as smartphones and tablets. This level of convenience, along with 24/7 trading capability and customer support services when needed, provide traders with a high level of confidence when conducting business.
While forex trading Australia and commodities trading have many differences as well as similarities, they both offer individuals the chance to achieve great wealth based on their ability to make the right decision at the right time. Whether it’s trying to predict the latest price of gold or silver, or if oil prices will rise or fall due to the latest world conflict, or if a country’s currency exchange rates will remain stable in the months ahead, there’s no doubt forex and commodities trading offer intriguing possibilities. By taking advantage of the resources offered on sites such as Pepperstone and others, traders can be well on their way to reaching their financial goals.