Table of Contents
Commodity trading
Over the entire history of the world, those living in each period often used trading as a way in which to get the things that they wanted. In today’s society, this idea is still alive and well through how this trading takes place has changed drastically. Most people use the money to purchase the things that they want. Though, within the stock market, commodity trading is still alive and moving smoothly.
Commodity trading refers to the selling of common goods and services that many people use. However, this trading does not mean that the actual products and services are being traded. Instead, it relates more to the worth of these goods and services. These are then used as a ruler to determine and regulate the costs of other things.
What is regarded to be a commodity may be different from person to person or even country to country? Most of the commodity trading in any particular situation will consist of the most frequently used things in that area. For instance, in areas where farming is an integral part of life, livestock and crops will be involved in commodity trading. Metals and energy are also normally considered to be commodities and can be traded.
History Of Commodity Trading
Historically commodity trading has brought the biggest fortunes universally. It originated centuries ago, even before the stock markets came into existence, albeit traded then differently, then seen today on electronic exchanges. I have frequently cited that ” If trading in the hypothetical markets, then Stocks & Equities is for boys, but Commodities is for men” (No gender bias intended). Wealth formation and creation is not a matter of chance. It is a process that needs adequate analysis & lots of work time.
But, let us start from begin…
The commodity market goes as far as 4500BC when the Sumerians used clay tokens sealed in clay vessels for exchange. Claying writing tablets were representing an amount of a given commodity. These tablets specified the time and date to deliver the merchandise. Primarily, tablets functioned like today’s future contracts. These times defined what would be a world-changing concept. Before people could think of standardizing trade contracts, commodities such as seashells and pigs were a commodity. Later on, silver and gold became the measures of exchange. Initially, the precious metal had its value based on beauty and association with royalty. As such, they came in handy when exchanging commodities or services. Ultimately, gold became money due to several factors. The scarcity, density, and ease of melting, and measuring gold were some of the dominant aspects.
Commodity markets strengthened when its utility became evident in the allocation of resources across Europe. The mechanism of distribution of goods, capital, land, and labor has a solid foundation in the commodity market. Additionally, the resourcefulness of this concept found life between the 11th and 13th centuries. The expansion and improvement of infrastructure, English urbanization, and the increasing use of coinage during these times were a picture of commercialization. The installation of reliable scales in Sloten and Osdorp in 1466 paved the way for understanding the benefits of the commodity market. In essence, the scales ensured no villager would need to travel to Harlem to weigh their local butter and cheese.
Amsterdam Stock Exchange and History of Commodities Trading
The first stock exchange, Amsterdam Stock Exchange, was originally a market for commodity exchange. The only improvement was the use of sophisticated approaches, which are now modern tools. More precisely, the market involved forward contracts, options, and short sales. The trade took place in the open air at a place called Amsterdam Bourse. The invention of the fair took place in 1530, and the venue became a spectacle after being rebuild in 1608. Commodity exchange is also a recent invention practiced in very few cities.
In 1602, when the Dutch East India Company (VOC) was first established, there arose a need for stable banking facilities on a larger scale. Before this, several local establishments facilitated the exchange of commodities through asset valuation and trade regulation at a smaller scale, but a larger trading platform was not available. This is the time when the earliest Amsterdam Stock Exchange was born. It is often considered the oldest stock exchange in the world that still runs, where business dealers first had some regulated trading and banking experiences. It all began when the VOC was awarded a 21-year charter for all Dutch trade in Asia by the Netherlands’ States-General.
Consequently, owing to the high risk of business in Asia, the company provided stocks to many investors. These investors received a guarantee of a share of future profits gained by the VOC. A secondary market soon evolved where the investors could sell some of their stocks through a regulated bookkeeper. This improved the investors’ confidence, and the trading market soon grew leaps and bounds, which is now known as the Amsterdam securities market. After completing the 21-year charter in 1623, the VOC was originally supposed to distribute its entire profits to the shareholders, as per the original terms. By then, however, trading in Asia grew so rapidly that the market was allowed to continue to operate in the same regulated fashion. This was the time when the VOC was given a second charter for trade in the West Indies. However, this time, no clause was provided to expect the VOC to declare full liquidation after the charter period was over. Instead, shareholders were given dividends from whatever profit the company made. Thus, the trading market continued in full bloom and gave rise to the stock market as we know it. Since the 1600s, this stock exchange has changed several hands, and multiple modifications to the regulations have been made. If we look at its history over the last and present centuries, we find governance and structural changes. For example, in 1997, the exchange went through a merger with the European Operations Exchange (EOE), which gave rise to its present-day blue-chip index, ‘AEX.’ In terms of equity indexes, there are currently more than twenty Dutch companies that trade on AEX, some prominent names being ING Group, Philips, Unilever, and Royal Dutch Shell.
The stock exchange had a significant merger with the Stock Exchanges of Brussels and Paris in the year 2000, to bring forth the Euronext Amsterdam. For several years after that, Euronext thrived as the largest cash equities markets of Europe, while also under NYSE. In 2014, however, it was spun out as an independent entity.
Amsterdam’s stock exchange played a crucial role in shaping the modern-day stock and securities market through its eventful past. The successful dealings of multi-national company shares, giving rise to regulated bookkeeping, allowing investors to sell shares to third parties, and multiple investors being paid dividends are some of the characteristics that gave a distinct direction to the entire business world.
The Chicago Board of Trade History
The Chicago Board of Trade’s early history was a chaotic time. The Chicago Board of Trade or CBOT was established in 1948 in the city of Chicago. ( The goal of CBOT was to bring structure and regulation to the Midwest’s budding grain market. The board offered “futures” to the farmers that would guarantee their selling price. The grain price was negotiated at planting time, and then the grain was sold for the agreed-upon price at harvest. This practice was mutually beneficial for both farmers and buyers. The farmers were guaranteed their profits, and the buyers were assured of their needed supply. The Chicago Board of Trade began with 25 directors. The directors were from all walks of life, not just grain merchants. The board standardized the grain market by specifying bushel sizes and identifying the different types of grains to be sold. The CBOT had a hard time gaining traction when it first began. Soon Chicago became a booming town as it grew throughout the 1850s. Chicago was connected to the railways during this time. Also, a canal was dug to connect Chicago to the Mississippi River. These improvements to the city made Chicago a booming center for the Midwest’s agricultural commodities. This created exponential growth for the board. In 1856 the board had experienced great growth and grew to over 150 members. In 1859, the Chicago Board of Trade received its charter from the state of Illinois. With its new charter and sense of autonomy, they were able to govern themselves and set up their own rules and regulations. They established their own unique systems for grading grain and organizing the sales of grain futures. In 1865, CBOT moved to its first permanent location in the Chicago Chamber of Commerce Building. The Chicago Board of Trade dealt with many scandals in its early history. Many traders tried to “corner” the market to control the prices and create more profit for themselves. Also, some people set up false fronts for futures trading called bucket shops. These shops would promise sales floor trading and not follow through. Rampant fraud and manipulation caused a public outcry and backlash against futures trading. This outcry went as far as the CBOT being called a “board of thieves.” Through all of this drama and scandal, somehow, the board still prospered and grew; they moved to their own building. In 1914, World War I began. The CBOT attempted to set reasonable prices for grains to keep the market moving at a steady pace. However, the US government asked the board to stop all futures trading. Futures trading stopped for three years during the war. When futures trading was re-established after the war was over three years later, wheat prices plummeted. This was unforeseen, but Midwest officials were furious. All of this led to the national government setting the first federal control of futures trading. This was known as the Grain Futures Act of 1922. The Chicago Board of Trading had a rocky start but still gained momentum and prosperity.
In conclusion, the Chicago Board of Trade (CBOT) provided the world’s oldest futures and options exchange for traders exchanging wheat, cattle, and pigs in the United States. Wheat producers came from Mid-West to sell their products to distributors and dealers. It is only recently that other food commodities featured on the Commodity Exchange Act. As a result, the CBOT traded rice, butter, Soybeans, eggs in the 1930s and 1940s. The classical civilization boasts of a structure that allowed trading gold for spices or cloth that exhibit timelessness or high-quality standards. Commodity market history has a summation during the 19th century. During this time, it became apparent the importance of the commodity market was indispensable. Exchanges led to improved transportation due to better roads, innovation, and financing, which plays a significant role in international trade. While the commodity market became more substantial, there arose a need for regulation. As a result, reputation and clearance were the epitomai of influence. States that take advantage of managing these two characteristics have critical financial centers.
Commodity Trading – Risks and Benefits
Let’s look into the various benefits and risks of online commodity trading:
Benefits:
• Investors have the advantage of accessing a variety of information required to trade in commodities. Live market news, quotes, analytical charts, projections, reports on commodities, etc., are made available to clients, which helps you immensely.
• Most online commodity brokers employ a simple trading platform enabling you to execute orders by yourself instead of approaching your commodity broker to act on your behalf.
• Online trading is usually cost-effective, and hence brokers charge lesser commissions and fees. This not only reduces your expenses but also allows you to explore multiple strategies, viz., spreads, day trading, etc.
Risks:
• Though online commodity trading enables you to decide strategy and execute orders, your inexperience in futures trading, lack of proper guidance may be detrimental at times.
• With live market updates at your fingertips, you may be lured into wrong moves, inappropriate trades and end up with huge losses.
• Investors usually drift from their commodity trading plans and get into speculative trading.
• You also run the risk of over-trading. Entering into positions for a couple of days to benefit from the fluctuating markets, lacking a proper understanding of markets, prices, commodities, etc., may end you up with losses.
• Online trading may spur speculative and gambling mindset in non-disciplined investors.
However, with the guidance of an experienced commodity broker and strictly adhering to your long-term strategies, you can mitigate online commodity trading risks. Also, acquaint yourself with the trading platform to avoid errors in order execution.
Major commodity markets
Australian Stock Exchange (ASE): Energy, environmental, financial, agriculture
BM&F Bovespa (Including the Brazilian Mercantile and Futures Exchange): Agriculture and financials
Chicago Board of Trade (CBOT): Agriculture and livestock
Chicago Mercantile Exchange (CME): Energy, precious metals, industrial metals, livestock, and financials
Korea Exchange (KRS): Financials and precious metals
London Metal Exchange (LME): Industrial metals
New York Board of Trade (NYBOY): Agriculture
New York Mercantile Exchange (NYMEX): Energy and precious metals
NYSE Euronext (ASE): Energy, environmental, financial, and agriculture (based in France)
Tokyo Commodities Exchange (TOCOM): Energy, precious metals, industrials metals, and rubber
Tips on Commodity Trading
People are aware that commodity trading can be hazardous. They may earn a lot, or they may also lose their fortune with just one trading move. Those who rely on speculation only may be putting their financial and emotional well-being at very high risk. Although the risk is always present in all of the things that people do include trading, there are ways to minimize it as much as possible. Traders can make even the worse scenario into an advantage, especially if they can control their emotions despite the setbacks that they fall into while trading.
While self-control is essential when trading, lots of people are not able to do it. They tend to have the urge to predict what would happen in the market at times without a real basis. However, they can instead improve their chances if they stick to their plans despite the odds. Traders have to be consistent in applying the strategies they have set, and they are not supposed to be depending on their “gut feeling” when making trade decisions. Following the trend carefully is one of the basics of commodity trading.
Another element involves cutting down on possible losses. Though losing some trades is expected, traders can minimize them by using tested and efficient trading techniques. They can get used to accepting some losses, but it should help them be more careful not to lose all of their money in the trading business. As much as possible, traders will have to see to it that they can keep down their losses to one percent only or up to five percent in the case of smaller trading accounts. People need to learn how to make use of their stop-loss orders at the right time so that they will be able to get out of trades that have hit loss limits.
There is a variation in the commodity market, and although traders may be using the same techniques, they have to be aware of these differences. Some commodities are more liquid, so traders will have to know the regular cycles that may occur over a given period. Trading commodities can also take its toll on traders’ psychological well-being, especially when they experience extreme emotions like elation for winning trades or frustration over losses. It is essential that they can put their feelings in check because of the changing nature of the market, which could sway direction either for or against them.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
