Commodity Trader

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In 2022, commodities with the highest return rates were nickel, with a 43.13% increase, followed by natural gas, corn, platinum, crude oil, silver, and wheat. On the other hand, those with the lowest rates were coal, zinc, aluminium, copper, and palladium.

Suppose you traded any of these commodities during that year. You might have gained a significant profit if you invested in those assets with high return rates.

You can earn money from commodity trading, but what is a commodity trader, and how do you become one?

What skills do you need to start trading commodities? What career paths can you pursue if you decide to become a commodity trader?

This article discusses how you can be a commodity trader. It also explores the skills essential to a commodity trader and the career opportunities related to this position.

When trading commodities like crude oil, natural gas, sugar, and coffee, look for a trading platform that offers competitive spreads and leverages. With plenty of trading opportunities, there’s almost always something to buy and sell.

Understanding Commodity Traders

The commodities market consists of several types of active traders buying and selling raw materials like copper for construction or grains for food products.

Some individual traders buy and sell commodities on major exchanges like the New York Mercantile Exchange (NYMEX). Others work full-time for large companies in commodity-producing industries like oil, mining, or agriculture.

Commodity traders working for producers or manufacturers usually seek to secure the best purchase prices while supplying competitive bids to customers.

Other traders work as broker-dealers (those who trade securities for themselves but can also deal on behalf of their clients). Meanwhile, professional traders working for brokerage firms help create a liquid international commodities market.

When you become a commodity trader, you act as a speculator (someone who trades or invests in securities for profit) and aim to profit from commodity price movements. You can go long (buy) if you believe prices will increase or go short (sell) if you think prices will fall.

What Is a Commodity Trader?

A commodity trader is a person or business investing or trading in physical materials like oil, gold, or agricultural products.

When you trade in the commodity market, most of your trades involve buying and selling futures contracts. These contracts are legally binding agreements to sell or purchase assets at a predetermined price on a specific date. 

What Does a Commodity Trader Do?

As a commodity trader, your main tasks are the following:

• Monitor international commodity market performance.
• Buy and sell prices that meet your or your client’s needs.
• Provide investment advice to your clients.
• Analyse market reports.
• Develop hedging (risk-limiting) strategies.

You can also buy and sell commodities as a trader through physical and derivatives trading.

Physical trading is when you trade the actual asset, like buying oil barrels or copper ingots and storing them in a warehouse. 

Meanwhile, derivatives are contracts whose price depends on the underlying asset’s value, letting you trade commodities without owning the physical asset.

Your tasks can also include visiting international shippers, especially when trading physical commodities and researching new business opportunities.

Commodity Trader Career Paths

Suppose you start working as a commodity trader. This job type can open new career paths that may lead to more responsibilities, access to a trading desk, or the potential to land a leadership role.

Some career opportunities you can pursue through commodity trader jobs are the following:

• Equity trader
• Finance advisor
• Sales trader
• Broker
• Consultant
• Analyst
• Buyer

Commodity Trader Demographics

Based on 2021 data, a few interesting demographic information about commodity traders are as follows:

• Over 15,883 commodity traders work in the U.S.
• The average age of commodity traders is 43.
• Commodity traders are in highest demand in Miami, Florida.
• The highest-paying sector for commodity traders is the finance industry.
• Women commodity traders earned 90% of what men commodity traders earned in 2021.
• Commodity traders are 74% more likely to work at private companies than public companies.

Commodity Trader Gender Distribution

In terms of gender statistics, 2021 data showed that 12.7% of commodity traders were women, and 87.3% of commodity traders were men. 

Meanwhile, pay gap data showed that female traders earned $79,033, while male traders earned $87,670. These figures indicated that women earn approximately 90¢ for every dollar earned by men.

Key Takeaways

If you want to become a commodity trader, some key points to remember are as follows:

• Commodity traders aim to profit from anticipated trends and arbitrage opportunities. 

Arbitrage trading involves exploiting the minor price differences between similar or identical assets in two or more markets.

• Commodity trading can help secure raw materials for an industry or business, create liquidity in a global market, or invest in a speculative capacity.

Is Commodity Trading a Good Career?

If you understand the benefits and risks that come with trading commodities and you have the time, skill, and experience to trade these assets, commodity trading can be worth considering as a career.

As discussed earlier, commodity trading can lead to other career opportunities related to finance and investment. If these career paths interest you, commodity trading can be an excellent starting point.

How to Become a Commodity Trader

One does not become a commodity trader overnight. To gain experience in this field, you may have to spend months or years learning the trade.

Once you have the skills, you can consider working as an individual commodity trader or applying for a related job in a trading company dealing with such assets.

For example, trading firms and financial companies like Macquarie Group, Morgan Stanley, and Société Générale often post job opportunities for trader positions.

The following section lists the top skills of an aspiring commodity trader.

Top Skills for a Commodity Trader

Some of the top skills you need to become an effective commodity trader are having the knowledge, skills and experience in the following fields:

• Commodities
• Logistics
• Market trends
• Derivatives
• Financial markets
• Technical analysis

Can Commodity Traders Make Money?

With the right trading strategies and risk management techniques, you have a good chance of profiting from trading commodities. Some businesses offer competitive salaries for commodity traders, giving you plenty of opportunities to make a living from this activity.

Average Salary for a Commodity Trader

As of July 2023, the estimated income for a commodity trader in the U.S. is $155,342 annually, with an average base pay of $93,963 yearly.

What Are Commodities?

A commodity is an essential material typically used in commerce and interchangeable with other goods of the same type. Production and manufacturing businesses use commodities as inputs in developing goods or services.

A commodity usually refers to a raw material used to create finished goods. On the other hand, a product is a finished good sold to consumers.

What Is Commodity Trading?

Commodities are bought and sold on exchanges, such as NYMEX and the Chicago Mercantile Exchange (CME) in the U.S.A., the London Metal Exchange (LME) in the United Kingdom, and the Shanghai Futures Exchange in China.

Commodities exist in several industries and in multiple forms, such as precious metals, agricultural products, oil, gas, and timber. 

Commodities with a similar grade or quality are called fungible, meaning they can be priced according to a standardised quality and quantity.

Although trading physical commodities is possible, not all traders have the time and resources for such an activity. If you’re one of these traders, you can instead trade in derivatives, which are financial contracts based on commodity prices.

The most common derivative is a futures contract. However, you can trade commodities through options and spot or real-time prices.

What Is Leveraged Commodity Trading?

Leverage or margin trading allows you to buy a commodity contract by funding only a percentage of the trade’s total value.

Suppose your broker requires a 10% margin on your trades. If you purchase a gold futures contract worth $120,000, you only need to deposit $12,000 ($120,000 x 10% = $12,000).

What if you buy the contract, but the commodity’s price moves against your position, causing you to lose more money than your deposit? The broker can prompt a margin call asking you to deposit more funds to cover the agreed margin.

Pros and Cons of Commodity Trading

Since commodity trading often deals with natural materials, numerous environmental factors can affect prices. For example, hurricanes and fires can affect crops, and trade restrictions can impact oil prices.

These price movements can negatively affect commodity traders, especially those who take a long position, since the drop in value can mean a loss.

However, other traders, such as short sellers, may profit from these price changes. Short sellers borrow shares and sell them later when prices fall so that they can repurchase them at a lower price.

As a commodity trader, you can face risks that may not exist in other markets like stocks or forex.

Additionally, you do not receive periodic cash flows in commodity trading, unlike in stock or bond trading, where you can earn dividends. To generate a positive return, you must accurately forecast your chosen commodity’s price direction.

How Can You Trade in Commodities?

To trade commodities, you can directly or indirectly buy and sell the asset. Direct trading involves purchasing and selling the actual commodity.

Suppose you’re a trader working for a company that manufactures computer parts. You can purchase raw materials like copper, silicon, and plastics and have them shipped to your facility. You can use these materials to create final products.

How Can You Trade Indirectly in Commodities?

If you’re an individual trader without a space for storing physical commodities, you can trade the underlying assets indirectly through the following ways:

• Exchange-traded products: Exchange-traded commodities (ETCs) and exchange-traded funds (ETFs) are great ways to invest in commodities at a low cost.

ETCs track commodity prices, while ETFs typically track an index’s performance. 

An index consists of a group of securities whose price performance can be measured in a standardised way.

• Collective investments: A collective investment fund is a collection of accounts held by a trust company or bank. A financial institution groups these assets from individuals and organisations to create one large, diversified portfolio.

A portfolio is a collection of financial investments like stocks, bonds, and commodities. It may also include assets like art, real estate, and private investments.

• Shares in commodity-based companies: Businesses that mine or process commodities may benefit from rising commodity prices as they can sell products at a higher price.

Which Commodities Are Traded Most?

The top five traded commodities are crude oil, natural gas, gold, silver, and copper.

However, you don’t need to limit your trades to these assets. Many brokers offer opportunities for trading other commodities like coffee, cocoa, cotton, sugar, and metals like platinum and palladium.

Oil Trading: A Multidimensional Discipline

When you trade oil commodities, you must understand the global oil economy’s interconnected nature. Conditions in the oil industry can change rapidly, and you must remain alert to many micro and macroenvironment factors.

The microenvironment comprises the sector’s immediate environment and stakeholders, such as suppliers, customers, and competitors.

Meanwhile, the macroenvironment consists of uncontrollable external factors, such as economic, technological, demographic, natural, social, cultural, political, and legal forces.

Trading and Transformation

You can work as a commodity trader in a logistics company that uses financial markets to fund its operations or hedge against price risks.

Logistics companies have a close association with commodities along the supply chain as these businesses provide transportation and transformation for commodities worldwide.

Should You Invest in Commodities?

Investing in commodities may provide a potential hedge against inflation and diversify your portfolio.

Diversification involves mixing distinct asset types to help limit your exposure to any single risk.

However, commodities can undergo high price volatility and potentially cause significant losses. Consider trading these assets only if you have enough user experience. 

Prior to making any trades, research the underlying factors affecting commodity prices and manage your risks so that even with short-term losses, you can still make long-term gains.

What Legislation Regulates Commodity Trading?

The Commodity Exchange Act (CEA) is a U.S. legislation passed in 1936 to regulate trading activities involving commodity futures. This Act grants the Commodity Futures Trading Commission (CFTC) authority to establish regulations governing commodity futures trading.

When choosing a trading platform, look for a regulated and licensed broker that also provides exceptional client support to improve user experience.

References

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

8. Macro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

7. Micro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/micro-environment

8. Macro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

6. Financial Portfolio: What It Is, and How to Create and Manage One https://www.investopedia.com/terms/p/portfolio.asp

7. Micro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/micro-environment

8. Macro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

5. Collective Investment Fund (CIF): History, Pros & Cons, Example https://www.investopedia.com/terms/c/collective-investment-fund.asp

6. Financial Portfolio: What It Is, and How to Create and Manage One https://www.investopedia.com/terms/p/portfolio.asp

7. Micro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/micro-environment

8. Macro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

4. Arbitrage: How Arbitraging Works in Investing, With Examples https://www.investopedia.com/terms/a/arbitrage.asp

5. Collective Investment Fund (CIF): History, Pros & Cons, Example https://www.investopedia.com/terms/c/collective-investment-fund.asp

6. Financial Portfolio: What It Is, and How to Create and Manage One https://www.investopedia.com/terms/p/portfolio.asp

7. Micro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/micro-environment

8. Macro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

3. Futures Contract Definition: Types, Mechanics, and Uses in Trading https://www.investopedia.com/terms/f/futurescontract.asp

4. Arbitrage: How Arbitraging Works in Investing, With Examples https://www.investopedia.com/terms/a/arbitrage.asp

5. Collective Investment Fund (CIF): History, Pros & Cons, Example https://www.investopedia.com/terms/c/collective-investment-fund.asp

6. Financial Portfolio: What It Is, and How to Create and Manage One https://www.investopedia.com/terms/p/portfolio.asp

7. Micro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/micro-environment

8. Macro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

2. Commodity Trader: Definition, What They Do, Where They Trade https://www.investopedia.com/terms/c/commodity-trader.asp#toc-pros-and-cons-of-commodity-trading

3. Futures Contract Definition: Types, Mechanics, and Uses in Trading https://www.investopedia.com/terms/f/futurescontract.asp

4. Arbitrage: How Arbitraging Works in Investing, With Examples https://www.investopedia.com/terms/a/arbitrage.asp

5. Collective Investment Fund (CIF): History, Pros & Cons, Example https://www.investopedia.com/terms/c/collective-investment-fund.asp

6. Financial Portfolio: What It Is, and How to Create and Manage One https://www.investopedia.com/terms/p/portfolio.asp

7. Micro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/micro-environment

8. Macro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm

1. Rate of return on selected commodities worldwide in 2022 by type https://www.statista.com/statistics/825543/returns-on-selected-commodities-worldwide/

2. Commodity Trader: Definition, What They Do, Where They Trade https://www.investopedia.com/terms/c/commodity-trader.asp#toc-pros-and-cons-of-commodity-trading

3. Futures Contract Definition: Types, Mechanics, and Uses in Trading https://www.investopedia.com/terms/f/futurescontract.asp

4. Arbitrage: How Arbitraging Works in Investing, With Examples https://www.investopedia.com/terms/a/arbitrage.asp

5. Collective Investment Fund (CIF): History, Pros & Cons, Example https://www.investopedia.com/terms/c/collective-investment-fund.asp

6. Financial Portfolio: What It Is, and How to Create and Manage One https://www.investopedia.com/terms/p/portfolio.asp

7. Micro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/micro-environment

8. Macro-environment https://www.monash.edu/business/marketing/marketing-dictionary/m/macro-environment

9. What Is Diversification? Definition as Investing Strategy https://www.investopedia.com/terms/d/diversification.asp

10. Commodity Exchange Act & Regulations https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm