A Quick Look: Commodities & Forex

Commodities

The commodities market is comprised of instruments in the energy, metal and agriculture industries. Some of the most common commodities that are traded are gold, silver, copper, crude oil, corn etc. There are many different ways to trade the same commodity, for example gold can be traded in both grams and ounces. You could also purchase futures/options contracts instead of trading in the spot market. Depending on your broker and your account balance, you will have to decide which commodity you want to trade, and how you want to go about it.

Note: You are not buying physical quantities of these commodities. Don’t worry about thousands of barrels of oil showing up at your door. Trades are financially settled and not physically settled.

Forex

Forex is short for foreign-exchange. The Forex market comprises of exchanging one currency for another. Just like how you would exchange your money for ownership of a stock, bond or commodity, in forex you are exchanging one currency for another. If you’ve ever travelled internationally, you’ve probably participated in the forex market when you exchanged your home country’s currency for the local currency. Trading in the forex market is in a way the same thing but you’re doing it virtually. Forex instruments are usually listed in pairs ex: EUR/USD. So if you decided to buy EUR/USD you would be buying Euros and selling US dollars. And when you decide to close the trade by selling, you would be doing the opposite i.e. selling the euros you bought and buying back dollars. You would do this if you thought the European economy would do better than the US economy in the short or long term depending on your style of trading, resulting in an increased value of Euros. The goal, just like any other trading instrument, is to buy low and sell high. In terms of daily volume, the forex market is much bigger than other markets with a volume of over five trillion dollars worth of transactions each day. Unlike stocks and bonds, you cannot use a centralized exchange to buy currencies, instead the liquidity is provided by the interbank pool and is accessed through forex brokers.

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