Understanding Commodities and Investment Methods for Beginners

Currently, many investors are shifting their interest toward investing in (Commodity) products more and more. This raises the question: what exactly is a commodity, and how can you successfully trade commodities? This article provides detailed information, including the meaning, types, factors affecting prices, and suitable trading methods for beginners.

What is a Commodity (Commodity) and its Meaning

Commodity or สินค้าโภคภัณฑ์ refers to basic raw materials used in the production of other goods or services that humans need in daily life. Common examples include copper, crude oil, wheat, coffee beans, and gold.

Commodities can be divided into 2 main types:

• Hard Commodities: Natural resources that require mining or extraction, such as metals, oil, and gas.
• Soft Commodities: Agricultural products that are cultivated and harvested, such as wheat, coffee, and sugar.

Classification of Investable Commodities

Agriculture Sector

Products from cultivation, such as sugar, cotton, and coffee beans. They have limited storage life and high price volatility due to weather-related risks.

Livestock Sector

Products from animal husbandry, such as pork, beef, and other animal-derived products.

Energy Sector

Key energy products, such as crude oil (UKOIL) and natural gas (NATGAS).

Metals Sector

Valuable metals and important minerals, such as gold (XAUUSD), silver (XAGUSD), copper (COPPER), and palladium (XPDUSD).

Factors Influencing Commodity Price Movements

Demand Factors (

Increasing income levels and population size affect the prices of various commodities. In low-income countries, as income rises, demand for food products increases more rapidly than in high-income countries.

) Supply Factors ### Production factors such as labor, capital, land, water sources, and natural resources depend largely on production efficiency and management.

( Uncertainty and Emergency Events Weather conditions, natural disasters, and volatility caused by investor speculation can lead to rapid price changes.

Advantages of Investing in Commodities

) 1. Hedge Against Inflation Commodities like gold and oil tend to increase in price when inflation rises, making them good hedging tools.

2. Portfolio Diversification

Commodities have low correlation with stocks and bonds, helping to reduce overall portfolio volatility.

3. High Profit Opportunities in Uncertain Times

Commodity prices can rise quickly due to supply-demand imbalances.

4. Long-term Growth Potential

Demand for certain commodities, such as gold and coffee, tends to increase steadily over time.

Disadvantages and Risks to Watch Out For

1. High Price Volatility

Commodities are twice as volatile as stocks and four times more volatile than bonds. Crude oil and gold, in particular, are highly volatile.

2. Impact of Leverage

Online trading often involves high leverage, which can increase profit opportunities but also the risk of significant losses.

3. Inverse Relationship with Financial Markets

Generally, commodities tend to move inversely to equities.

4. Environmental Impact

Mining, livestock, cultivation, and extraction of commodities often have environmental consequences.

4 Ways to Invest in Commodities for Beginners

Method 1: Commodity ETFs

Investing in derivatives or futures contracts through funds that support commodity trading instead of holding the physical goods.

Advantages:

• Start with a small amount ###buy just 1 unit###.
• Can be traded online anytime during market hours.
• No worries about storage, theft, or additional costs.

( Method 2: Commodity Futures Forward contracts that agree on a price today but deliver or settle in the future. Commonly used for gold, oil, and gas.

Advantages:

• Profit from price increases or decreases.
• No need to invest the full amount, as margin trading is used )Margin###.
• Suitable for traders with limited capital.

( Method 3: Stocks of Commodity Companies Investing in shares of companies involved in raw material production or trading, such as BHP Group Ltd., Rio Tinto Group, Vale SA.

Advantages:

• Diversify risk across multiple companies.
• Hedge against inflation.
• More stable than direct commodity trading.

) Method 4: CFD Trading on Commodities Online trading via contracts for difference without physical delivery. Positions increase or decrease with price movements.

Advantages:

• Profit in both rising and falling markets.
• Can sell immediately without owning the asset.
• No need to rollover contracts like futures.
• CFD markets are open 24 hours, 5 days a week.
• Access to a variety of commodities and other markets.

Costs Associated with Commodity Trading

Investors should consider various costs, including:

1. Spread ###Spread###

The difference between buy and sell prices, e.g., gold with buy at 1949.02 and sell at 1949.47, spread = 0.45.

( 2. Overnight Swap )Swap### Fees charged for holding a position overnight (23:59).

( 3. Commission Some instruments charge a commission for opening and closing trades.

Calculate all these costs beforehand to understand how spread and fees will impact your budget.

Commodity Trading Time Schedule

Commodity trading hours are not 24/7 and vary by product:

)Note: Times are in Thailand time zone###

Summary about Commodities and Investment

Investing in commodities is an effective tool for diversification and inflation hedging. However, choosing the right investment method according to your capital and goals is essential.

Key steps for beginners:

• Study the characteristics and factors influencing commodity prices.
• Select a reputable broker with low commissions, narrow spreads, and convenient deposit/withdrawal.
• Do not invest all your funds in a single commodity; diversify your portfolio.
• Understand the risks involved and plan risk management strategies before trading.

Gold, coffee, sugar, and copper remain attractive investment options for investors with sufficient knowledge and good planning.