How to trade soft commodities - and which are most popular
Trading comes in many forms, as do the financial markets available for you to invest in. To create the best chance of profit for each of your trades, and more success in your overall trading journey, you need to know how each of these trading styles work. A widely used form of trading, which you should certainly familiarise yourself with, is soft commodities trading.
The uniqueness of soft commodities and the process involved with their investments can be complex. However, this article will take you through how to trade soft commodities, as well as which ones are being traded most on the current market.
Read on to find out more.
What are soft commodities?
Soft commodities are one of the two different types of assets you can invest in on the specific market. The first type – hard commodities – defines any type of goods or materials which need to be extracted or mined. Examples can include gold, natural gas, and oil.
Soft commodities, on the other hand, don’t need to be retrieved this way, as they’re goods and materials which are grown naturally. These tend to be agricultural goods, such as coffee, sugar, wheat, or cotton.
Soft commodities are highly necessary for the running of many countries, and are therefore continuously sold and distributed worldwide. This leaves opportunities for traders to invest in the performance of soft commodity assets, to profit from the fluctuating prices as their values change.
How to trade soft commodities
There are various different ways to trade soft commodities. One method, which can be complex but also profitable, is through contracts for difference (CFDs). CFDs are financial derivatives that enable traders to speculate on the price values of soft commodities. With traditional trading, one would need enough deposited capital so that they may take full ownership of the underlying asset. Profits will arrive when the asset is sold at a higher price than it was bought for, after the market has risen, and the risk of losses is for when the market falls.
When trading CFDs, ownership is not needed for an investment. Instead, traders can purchase contracts on an asset, which speculate where the price will move next. If the speculation is accurate, the trade is successful.
There are two options when opening a CFD position on a soft commodity:
- Long position – this speculates on the soft commodity’s asset price rising, and contracts are bought with the intention to sell them at a higher price.
- Short position – this speculates on the soft commodity’s asset price falling, and contracts are sold with the intention of buying them back at a cheaper price.
The more accurate your CFD position, the more profit you could gain from your trade, so be sure to analyse the markets extensively to ensure a better foundation on which to execute your strategies.
Which soft commodities are popular right now?
Some of the most popular soft commodities being traded worldwide are (in no particular order):
There are various factors that can influence the popularity of soft commodities, and change the value they currently hold on the market. Traders aim to make the most accurate price speculations, so soft commodities drawing in the most volumes of trades can be ideal.
These influencing factors include:
- Supply and demand – a soft commodity that finds itself in short supply, but has a high demand from buyers, will increase significantly in value on the market.
- Environmental conditions – due to the nature of soft commodities (such as coffee), they need certain environmental conditions to grow, and if these are disrupted, the value of the commodities on the market will fall.
- Political relations – soft commodities need distribution, and when certain political relations prohibit this, the value of those commodities will suffer.
Soft commodities can be a great addition to your trading portfolio. When you execute your investments with the necessary skill, dedication, and knowledge, you could be reaping the rewards of highly profitable returns.
Not investment advice. Past performance does not guarantee or predict future performance.