BUSINESS NEWS - Commodities are goods that have economic value and can be exchanged or sold or used as raw material in production. Their prices are dependent on supply and demand.
Example of commodities include Gold, Silver, Crude Oil, Wheat, Maize etc. Since commodities are valuable, they are often traded as any other instrument on the financial markets.
There are also specialized markets where these commodities are traded, where sellers & buyers can connect to hedge their risk, speculate, find better price discovery etc. Commodities are often traded as futures & options instruments on the commodity markets while there are also options for spot settlements in these markets.
Commodity markets have existed for thousands of years, first current form of commodity exchange started in 1530 as Amsterdam Stock Exchange with open air venue while in 1864 in US, Chicago Board of Trade listed commodities as futures & options instruments. In South Africa, SAFEX started operating as derivatives exchange in 1990 offering derivatives on Commodities. SAFEX is now JSE Derivatives Exchange.
Most of the commodity exchanges worldwide are now electronic making it is easier for participants to get instant execution of orders and better price discovery. Since the adoption of electronic technologies in Commodity Markets, commodity trading has gained a lot of attention of retail investors and institutional investors who often speculate on Commodity price movements with an aim to make profit.
South Africa’s Commodity Markets are very developed and JSE’s Commodity Derivatives market had 2.8 billion volume in 2020 from January to October. There is a growing interest among SA retail investors looking to invest in Commodities.
If you are looking to trade in commodities, here’s you what you need to do.
South African investors can trade in commodity markets by following steps.
- Choose a Commodity Trading App or Broker
Choosing a broker is the first step involved in trading in any financial market and the same is the case in commodity trading. Commodities are commonly traded in two ways in South Africa namely – through the JSE commodity derivative market or as CFDs through FSCA regulated forex brokers licensed for CFD instruments.
JSE derivatives market offers futures and options contracts on various commodities like agriculture goods, metals, energy and also global commodity markets. Most of the commodity trading volume in South Africa is done on JSE. It is ideal for all types of participants like commodity buyers, sellers, hedgers and speculators. It even often offers physical settlement for some of the commodities.
If you wish to trade with the JSE commodity derivatives market, you need to seek for a suitable and reputed JSE authorized broker in South Africa. ABSA Capital, Nedbank, Standard Bank, Intrepid, Investec Securities are some of the examples of JSE authorized commodity brokers in South Africa.
Another popular option to trade the commodities is through CFD instruments, this option is only suited to experienced speculators who only wish to speculate on the movements of prices of the commodities. It is not meant for risk hedging. You don’t own any physical commodity through this medium. CFD is an agreement between parties i.e.: broker and speculator to settle the price difference at a particular time.
CFD trading in South Africa is a regulated financial instrument. If you wish to trade commodities through CFD (contract for difference), you need to find a reliable CFD broker that is licensed and regulated by the FSCA (Financial Sector Conduct Authority). The broker must have a ODP or derivatives license from FSCA. Foreign based brokers must obtain FSCA license to offer services to SA traders.
A large number of South African and international brokers offer CFDs on commodities in South Africa and they are also licensed by FSCA. For example, Hotforex, FXCM, Avatrade, IG, Plus500, CMTrading, etc.
Any broker that you select, whether for JSE commodity market or CFD trading, it must be compared on multiple factors to identify the one that is best suited for your needs. Each broker might have different features and can be compared based on fees, commission, platform, customer service, and online reviews by professionals and clients.
Generally, you should prefer a broker that is well regulated and has a good reputation in the market with years of standing. Plus, you must compare fees of the commodities that you to trade at various top brokers and you must also look at their platform and read their reviews online.
Its best to create a demo account with the broker to test out their service before you deposit any money with them. - Opening a Trading Account
Once a broker is selected, the next step is to open an account with the selected broker. The process of account opening has become much easier these days due to online processes compared to the traditional offline process. The user needs to enter basic details including personal, contact, and financial information.
Some brokers offer multiple types of accounts and allow clients to choose the one that is ideal for oneself. You must check which account type is ideal for you as some account might have lower fees on each trade than others. You must compare fees for the commodity that you want to trade at the broker. - Completing Paperwork
After filling out the details and choosing the account type, individuals need to provide the identity and address proof to the selected broker. The KYC verification is generally completed within 24 hours on a working day but varies from broker to broker.
Besides above verification, brokers may ask you to file FICA documents for AML requirements (anti money laundering). - Deposit Funds and Start Trading
The last step is to deposit the minimum required amount to the broker and start trading. Beginners as well as experienced traders should trade commodities that they are familiar with - in order to predict the price movements.
The steps to setup a commodity trading account are generally simple to follow but the traders need to understand the concepts involved in futures, options or CFDs depending how you want to trade the commodities.
Moreover, to make better trading decisions, education and analysis of the commodities will play a very crucial role. You must clearly understand terms & risks of the instrument you are trading commodities with.
Risks and things you must understand before trading commodities
Commodity markets were originally designed to offer price discovery to buyers & sellers of commodities. But with increased retail speculative participation these days, though it offers more liquidity to the markets, but it is now open to more manipulation and volatility.
It is important to understand that Commodity Trading involves various risks for all participants; if you are speculator in for speculation or if you are buyer or seller or financial entities like bank using it for risk hedging.
So, you must understand all the risks involved before you enter any position.
Adequate research and analysis are required for the selected commodity for better predictions of price movements. It is important to understand that commodity market is a risky financial market as it is affected by many other unknown factors besides supply & demand and can lead to terrible losses at times when you are unable to judge these factors or you are using highly leveraged positions to enter the market.
Commodity traders must understand and should be ready to take the risks involved in the commodity markets like operational risk, market risk, cost risk, political risk, leverage risk, performance risk, illiquidity risk, price risk etc. Any of these risks can impact the price of the commodity.
Choosing a well-regulated, licensed, and authorized broker and spending enough time & effort on research and analysis can greatly mitigate the risk involved. Beginners should try their strategies on a demo account before initiating actual trades to gain experience in the commodity market.
Article supplied by Forex Brokers SA.
