Most of the trading information you find covers trading the stock market. In this video, I talk about the difference between investing in stocks, trading stocks and trading commodities online.
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Most articles on trading markets focus on the stock market. If you do a google search on the phrase “stock market”, you get 67,900,000 websites returned in the results. When you search for the phrase “commodities market”, only about 336,000 websites show up. So it is worth taking a look at the fundamental difference between online trading of commodities and online trading of stocks.
The fundamental nature of stock markets is around investing. There is a big difference between investing and trading, however. When you invest, you put your capital to work for the entity or company that you invest in, in the hopes that your capital will help this entity or company grow (i.e. appreciate in value). When that happens, your own capital increases in value also, and all is well.
Does that mean you can’t trade the stock market? Sure you can, but there is a very big difference between trading and investing. When you trade in the stock market, you trade your money for shares in a company (or derivatives of shares such as options), or trade your shares for money — and hopefully you can time those trades such that you end up with more money at the end than you had at the beginning. You are not really concerned with growth of an entity, you are not really concerned with making your capital work to help that entity expand.
Trading of commodities is very different. In commodities futures markets, commercial traders want less uncertainty in the price of the physical commodity that they produce or buy. They buy or sell a future in the commodities market because they like today’s price and don’t want to take a chance on the price fluctuating too much. In other words, they buy certainty.
In the same markets, speculators (large and small) buy (or sell) these futures in the hope that they can make a profit from future price fluctuations.
So what is really traded in online commodities or futures markets?
Risk!
- Commercial traders trade risk for greater certainty. At the end of the day, they have less risk and greater price certainty as a result of their trading. And they are willing to pay a premium for this
- Speculators trade risk for potential profit. At the end of the day, they are taking on the risk that the commercials don’t want. And they are willing to do so because they hope to make a profit!
Notice how different this is from stock market trading? Notice how these different trader profiles certainly have different motivations in the market? Are these differences we can take advantage of in our trading? You bet!
Do you use stock market trading techniques in your commodities trading? Do you take advantage of knowing and understanding these two different trader profiles? Let us know what your biggest challenges are in doing so (or not doing so) by commenting below!
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