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Commodity spreads 1: What are commodities and what is interesting about them?

13 Nov 2017,

I have been writing articles for my readers and commodity enthusiasts for two and half years. You will find among them a decent amount of my know-how, my practices, advice, current analyzes, etc. But you have also asked me for the complete basics. I understand that because it is difficult to find those basic ideas in such number of articles. That’s why I have decided to create a comprehensive series of articles on commodities and spreads from the very beginning.

Today’s topic is: why did I choose commodities for trading?

Why they are interesting for me? I admit that the first thing that led me to the world of commodities was my inner feeling. What do you feel when you hear the words as coffee, cocoa, sugar, corn, orange juice. I think those are very nice things that we associate with everyday life – favourite morning chocolate milk (you can find three commodities – cocoa, milk, sugar), afternoon coffee with a piece of chocolate or an excellent sweet cake. In summer, cooked or roasted corn, or refreshing orange juice, salt popcorn in the cinema…

Of course there are many other commodities. There are also wheat, soybean, cotton, meat or precious metals, etc. Commodities also include gasoline that we need every day, or oil that is part of many necessary things, etc. Commodities are divided into groups:

  • energies
  • grains
  • meat
  • precious metal
  • softs
  • milk products

 

When I was looking for the right way to enter the world of stock markets, the commodities did not seem so strange to me, and I was tempted to learn more about them. This is the first reason, in terms of my feelings, why commodities have taken me in from the beginning.

 

Another reason is the practical side

Commodity price movements are meaningful. It’s not just a virtual derivative, share, or something. These are the real physical things that people need and there is a real supply and demand. For example, when a corn is harvested in autumn, stocks increase, pushing the price down. If, on the other hand, we are in time just before the harvest (stocks are no longer large) demand is suddenly rising, the price of corn may grow up steeply. You surely know it from your own life – when there’s a lot of something, it’s usually cheaper. On the contrary, when there are just few pieces and the demand is high, the price is growing (a recent example with butter in Europe).

However the price of the commodity cannot be out of reality for too long. The price is limited from above by falling demand. When something is too expensive, people do not buy it that much. For example, we will probably buy butter for €3, but if the cost would be €10, then we will better look for something else. Therefore demand is logically reduced when high prices are reached. On the other hand, too low price is causing smaller offer. When corn is cheap, its production will no longer pay off to farmers. There will be less corn at the end. Again, we get to the beginning – decreased stocks lead to a higher price.

 

You see that it makes sense and everything has its reason. When equilibrium disappears from the market, sooner or later we can expect the market to be balanced again. And that’s exactly what I like. I have always liked things I can easily and logically explain without having to think about something complicated. Commodities are therefore perfect for me.

What’s next?

In the next part of the series I will explain how the most common commodities are traded on the commodity exchange. Then we will need get the understanding of what commodity spreads are.

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3 Comments

  1. notch SQ

    Thank you. I look forward eagerly for the next article.

  2. cityguy

    NIce, I like the topic! Do you offer your complete course also in English?

    1. Quastic

      Complete course in English is now being prepared, so please stay tuned.

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