eToro offers a great variety of assets for you to choose from and commodities are one of them. Despite commodities being one of the oldest financial assets, trading commodities may not be as straightforward as it seems. What they are, how do they work and how are they are traded on eToro? You can find a quick guide to answer these questions below.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 68% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is a commodity?
Commodities are basic products or goods, often thought to be raw materials or inputs for the production of goods and services. The most common types of commodities are oil, natural gas, agricultural commodities such as coffee, cotton or wheat etc. Previously commodities were traded on a physical market; nowadays of course that is not always feasible and commodities are traded on exchanges like other financial instruments. For some investors on eToro this type of asset can be an important tool of portfolio diversification. Prices of commodities are affected by the basic interaction of supply and demand, economic growth, consumer and manufacturing trends. Commodities are generally considered to be a risky asset class as prices of these assets are often affected by unpredictable events, such as political instabilities and sanctions, as in case of oil and natural gas, unfavorable weather conditions, as in case of agricultural goods and other events.
Why trade commodities?
There are many reasons as to why one would choose to trade commodities on eToro. Prices of these assets tend to be quite volatile and that leaves an opportunity to make a profit for those having the knowledge and skills to do so. Because you can open both short and long positions on eToro you can potentially benefit from price movements in both downward and upward directions. eToro also allows you to trade these with leverage and this has a potential to amplify your profits; beware however, that leverage can increase your losses as easily as gains and should be used with caution. Volatility can likewise be detrimental to your trading, so do not forget to implement the appropriate risk management techniques.
Because of the way in which prices of commodities fluctuate they can often be used as a hedge against inflation. This is because prices of these assets tend to rise with increasing inflation. Also, because commodities often exhibit a low degree of correlation with other types of trading instruments, like stocks or ETFs, they can be added into an eToro portfolio for diversification purposes to manage the total level of risk of their holdings. Prices of commodities tend to move in the direction which is opposite to the direction of stocks. Finally, markets for trading commodities are open for the majority of the week, unlike for example, stock markets, which offers additional flexibility in your trading process.
Types of Commodities on eToro
There are several types of commodities available on eToro and in general they are classified into these 3 main types:
- Energy commodities: these mainly relate to oil and natural gas, but also crude oil futures available on the platform.
- Agricultural commodities: these types of commodities are used as input materials in the food industry, such as sugar, wheat or cocoa, but also raw materials for other sectors such as textiles, as in case of cotton. These types of commodities are often referred to as ‘soft’ commodities as they are grown on farms, as opposed to ‘hard’ commodities which are extracted (oil) or mined (metals) from the ground.
- Metals: metals are a very important groups of input materials for a variety of industries, from power plants, construction, to electronics and food processing; eToro offers silver, gold, nickel and many other metals for you to choose from. Some investors decide to invest into metals in times of market volatilities as these assets have a ‘real’ tangible value.
How to trade commodities on eToro
eToro tries its best to make the process of trading and investing as easy as possible. Commodities are traded using CFDs on the platform. CFD trading offers additional flexibility in your trading but also increases risks. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investors accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Trading CFDs does not actually provide you with the ownership of the asset yet you can still trade it and potentially make a profit, as well as use leverage with caution (eToro offers a leverage of up to 10 times for commodities). Beware of the costs of spreads charged on CFD trading. You can open a trade in terms of a monetary amount but also the number of units you wish to sell or purchase.
CFDs are not the only way to trade commodities on eToro. There are also ETFs tracking several types of commodities as well as invest or trade stocks of companies that produce commodities. Finally, eToro also offers commodities futures, like shown on the image below. Futures contracts represent an obligation to buy or sell certain amount of an asset in the future at a pre-determined price.
As previously mentioned, commodities are quite volatile and may lead to losses on your positions and it therefore important to implement some risk management techniques. The two generally distinguished risks are price risk, resulting from unexpected fluctuations in commodity prices, and also leverage risk, as although leverage can amplify your gains it can also increase losses. Here are some of the possible options of risk management available on eToro:
- Stop-loss and take-profit levels: these are some of the most basic risk management techniques that help to reduce potential losses on your positions before they become too large (stop-loss) or exit when target profit levels are achieved (take-profit). eToro also offers the option of a trailing stop-loss to its users
- Diversification: another common risk management technique which involves spreading your risk over more than one type of asset while constructing your eToro portfolio.
- Setting an appropriate trade size: deciding on an optimal size of each trade is another key risk management technique; a trade size which represents a significant proportion of your available capital may expose you to too much risk.
Trading and investing always involves a certain danger of losing your capital and you need to make yourself familiar with the risks and how to manage them.
Hopefully by now you have a better understanding of what commodities are, how they operate and how to trade them. Remember that trading and investing involves capital loss risk and enjoy eToro platform! Best of luck.
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eToro is a multi-asset platform that offers both investing in stocks and crypto assets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results. Trading history presented is less than 5 complete years and may not suffice as basis for investment decision.
Copy trading is a portfolio management service, provided by eToro (Europe) Ltd., which is authorized and regulated by the Cyprus Securities and Exchange Commission.
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