Until recently, commodity trading was mainly for professional market players. This asset was traded in the futures market almost exclusively. The seed money to get going in futures is very high and therefore, private investors were rare.
A couple of years back, the new financial product of CFDs (contract for difference) was developed which opened the market for new investors with a smaller purse. This was and is a great opportunity because it’s now possible for everyone to participate in commodity trading. At the same time, however, it should be noted that trading with gold, silver, oil and all kinds of commodities is still very complicated with CFDs and you have to put considerable effort into it if you want to become successful.
With the fairly new financial product of binary options, you are also able to participate and trade the commodity market. In addition, binary trading is much easier to learn than futures or CFDs. The reason for this is that you don’t have to get used to the little differences in all kinds of commodity assets. When trading binary options, you just have to predict the direction of the price movement of the underlying asset – in this case, commodities. If the option is in the money when it expires, you win a predetermined amount. You know your risk and your reward exactly before entering the trade and you can adapt your trading strategies accordingly.
Commodity Trading Tip
The British company 24Option is an outstanding broker for commodity binary options trading. The software is easy to use, no slippage and you can choose between many commodities like gold, silver or oil.
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The market of commodities
The commodity market is one of the biggest markets in the world with a share of about one third of all international trade. You can differentiate between a couple of different sub-asset classes:
- energy commodities (oil, gas, coal, …)
- metals (iron, aluminium, steel, cooper, …)
- precious metals (gold, silver, platinum, …)
- agricultural products (corn, coffee, sugar, …)
The major trading places for energy commodities, metals and precious metals are the New York Mercantile Exchange and the London Metal Exchange. Agricultural products are almost exclusively traded on the Chicago Mercantile Exchange.
Commodities are a very popular investment product especially in times of crisis. Gold and silver are probably the main “alternative” asset classes. However, even oil can be a very interesting “alternative” investment.
These three main commodity asset classes can be traded with all big binary option brokers online.
Gold, silver and crude oil
Many investors regard the gold market as a safe haven. In times of crises they shift their assets from stocks and bonds to precious metals, especially gold. This is because gold is a valuable commodity which will not always be in endless supply.
Gold is very popular for sure but the practical use is basically limited to the jewelry industry. India is the strongest market for this precious metal because of the very high increase in demand during the Indian wedding season. “You can’t understand the logic of the obsession for gold. For Indian people gold is holy and a reflection of God.”, says the Indian expert in mythology Devdutt Pattanaik.
Silver, in contrast to gold, is highly demanded by the electronic and solar industry and is even used in water treatment and drinking water production.
Crude oil is not as important as the precious metals gold and silver when it comes to alternative investment products. However, oil is a very limited resource as well and therefore has an edge on stocks and bonds in times of crises.
You can find more information on gold, silver and oil binary options here:
Binary options and commodity trading
In comparison with futures, you can enter the commodity market using binary options with a very small investment amount. For example: If you buy one contract of gold in the futures market you basically buy 100 ounces of gold. At a current market price of $1622 for one ounce (June 6th, 2012) this represents $162,200 for just this single contract. This is probably too much for an private investor even with a margin account where he doesn’t have to deposit the whole amount.
When trading binary options you can start with a very small investment. You just need a good feeling for the price development to be successful. Do you reckon that the price of gold, silver or oil will go up? There is nothing simpler than that: You buy a call option to profit from your prediction. Do you think the price will go down? You simply buy a put option.
You have another big advantage when trading commodity binary options. The price of commodities is quite often very volatile. If you are trading futures or CFDs, you get stopped out of your positions a lot. You have to set stops to protect yourself against losses. There is no way around this. However, you don’t have this problem with commodity binary options because you simply don’t need stops. You are betting on the direction of the price movement and there is no need for stops.
You might be interested in this information as well:
- CNNMoney: Oil, Silver and Gold Prices