Hello and a very warm welcome to this, the first episode of the theory of COMMODITY SPREAD
TRADING, I have very happy that you have decided to take this course to start you on the road
to becoming a spread trader, we will take things slowly, starting with the basics and
moving on to the more interesting and operational aspects in later videos
Don’t worry if at this stage some of the concepts are not immediately clear.
This is only normal when you are starting something new, it was for me, and to be honest
it probably was for all new traders when they started their learning journey.
You have to start at the beginning, this is always the case with a new activity, but I
guarantee you that in a short time, the steep learning curve will start to level out and
things will become easier to understand, the possible fear of learning something new will
abate, and we will begin to enjoy our journey together more and more ..
At this point in time, to be perfectly honest, you will need a little patience to master
the basics, but eventually, with perseverance, you will be in a position to reap the rewards.
This first episode is aimed at giving you an introduction to the world of commodities
and is split across two videos.
In this the first video we will look at, What is a commodity, Why trade commodities?
And finish off the session by looking at The Types of commodities
We need to understand the basics and will, therefore, have to understand certain terms
or concepts, don’t worry this isn’t going to become a classroom session, we just need
to ensure that you understand some of the fundamentals before moving on to more complex
matters.
So a quick definition for the record: A Commodity or raw material is a natural resource
that can be subjected to processing and selling, they are the essential components for the
creation of other goods, think of them as the building blocks that underpin the production
of food as well as industrial and domestic materials.
They are something tangible, that we see every day on our table or otherwise make daily use
of.
We use commodities to improve the diversity of investments our portfolio, something we
will look at later on in the course.
So let’s look at why we use commodities, there are many factors that can influence
the markets and the prices of not just commodities but other financial instruments as well, factors
such as the impact of inflation can cause markets to change, we can use commodities
to help offset this and benefit from the seasonal cycles which influence commodity prices, this
last part be explained in more detail later in this course.
So looking at little deeper at these factors starting with inflation.
A commodity can be used as a natural hedge against inflation, they are real physical
products and they react well to the risk of inflation often rising in price as stocks
and share prices fall, they are among the few financial products that do this, so using
them in your portfolio could be seen as insurance against inflation, but also we can look to
use them as a long or very long-term investment.
Diversification: When investing, it is always advisable to diversify across your portfolio
by investing in different instruments and markets to reduce risk, it, therefore, makes
sense to have a portion of our capital invested in raw materials, which often take a reverse
trend compared to the stock market, thus ensuring greater coverage for the entire portfolio.
From the knowledge gained from this series of videos, you'll discover how spread trading
gives you the ability for even greater diversification than traditional investment instruments such
as stocks and shares of the raw materials.
On this slide, we can see a chart, the first of many that we will see on this course, the
information is shown represents the increase and decrease of climatic temperature over
the course of a year.
Using this information it is not difficult to make a prediction, temperatures will drop
during the winter months, whilst in the summer they will increase.
Fluctuation in climatic conditions as well as other global factors that we will explore
further in the next video cause commodity prices to rise and fall at certain times of
the year, the prices of raw materials follow a similar pattern, they are impacted by, and
therefore related to, seasonal trends that these factors create
For example, it is easy to see how the price of energy commodities tend to rise in the
winter when there is a greater need for heating, the same can be said for other types of raw
materials, wheat prices, for example, can change according to whether it is the sowing
or harvesting season.
This is an advantage we need to understand, knowing that this is a cyclic condition and
that it is repeated every year.
Only the commodities market has this is a statistical and predictive advantage, knowing
in advance what the seasonal changes of various goods are, means that you can anticipate the
price movement, add to that the knowledge we will give you over the next few videos,
you too will be able to take advantage of it, and in turn start to make a good profit
from your investments.
It is important to understand that raw materials can be grouped according to some of their
common characteristics.
In the following section, we will explain these in more detail, so that you will understand
why we will treat them differently, apply different investment criteria in respect to
them and, above all, how they can be used to fulfill different roles in the composition
of our investment portfolio.
Commodities at a high level can be grouped into two main categories, soft and hard, in
the next few slides, we will look to understand what are the main differences in respect to
this, and explain how commodities are classified?
Soft Commodities These are raw materials which are grown or
bred (NOT those that are extracted).
The prices of raw "soft" materials tend to be quite volatile in the short term, due to
the risks arising from their perishability, which can cause sudden instability, prices
are also affected by the natural growth cycle that can create significant seasonal fluctuations.
We can take advantage of this volatility and use it to our advantage, but at the same time,
we will have to manage the risk it generates accordingly.
The classic soft commodities are corn, wheat, soybeans, rice, cocoa, sugar, orange juice,
and even livestock.
Hard Commodities Raw materials that are extracted from the
subsoil, or derived from other natural resources are defined as "hard".
They are also those materials that come from the processing or refining of the base material,
such as oil which can be converted into petrol.
The most classic hard commodities are petroleum, natural gas, copper, silver, gold, and platinum.
There are however exceptions to all rules!
There are some agricultural products, such as cotton that despite being grown, and therefore
you would think would be a soft commodity, fall into the hard commodity group.
The reason is that it does not deteriorate rapidly and is mostly used as an industrial
or production material, rather than being a food type.
So as we have just seen we can define a commodity as being either hard or soft, we can take
the classification further and split them into groups where the products are either
related or have similar properties, this grouping can help when determining how to trade with
commodities, this will be explained in a later video.
In the following slides, we will explore the various groups a little more, looking at which
commodities make up each group and the relationship between them.
Soya, for example, can either be traded as the base product soya beans, which is the
product that is grown or in the case of oil or meal, the derivatives that come from it.
Grain as a group is made up of products with similar properties, as you can see here they
are all products that are sown, grown and harvested.
It is a similar story with meats, this group is made up of products that relate to livestock
and the various stages of the animals' lives at which the product is used.
Tropicals groups together those raw materials that are grown in the sunnier or tropical
climates, where the need to have warmer growing season has a direct influence on the size
and quality of the harvest produced.
Moving on to hard commodities we see that metals can be grouped together, it should
be noted that even though they are grouped together, they may trade on different exchanges,
and possess different properties in respect to value as a precious or industrially used
material.
Finally, we would group together those raw materials that are used to provide energy,
as we saw earlier with soya, the products within this group could be the base raw material
for example crude oil or one that is produced as the result of the refinement of it such
as heating oil.
In all cases, they still possess similar properties and are influenced by the same seasonal factors.
There are so many different financial products to use, but an initial advantage that we would
like to point out is that by simply staying within the field of raw materials, you can
diversify your investments within your portfolio to offer protection against market movements
as well as longer-term investments So as a recap, in this video we have looked
at what raw materials are , some of the advantages of trading with them and how they are categorized,
to continue the journey towards portfolio growth and get closer to financial independence
we will move on to the second video, where we will cover more of the basic information
to allow you to get to know, and understand raw materials a little better looking at who
trades commodities, the factors that influence them and how they can be used for investment.
I look forward to speaking to you very soon, bye for now.