When it comes to trading, you can trade anything and everything; the sky is the limit. In investment parlance, the word ‘trading’ is generally associated with stock trading. However, there are many other than you can trade in the investment market, like soft commodities.
What are soft commodities?
Generally, agricultural products grown rather than mined or extracted are referred to as “soft commodities.” Soft commodities have been used in commerce for thousands of years, making them some of the oldest assets that are still accessible for purchase and trading today.
It continues to play a sizable part in the total daily trading volume on all international markets.
The buying and selling of various commodities and their derivative products are known as commodity trading. Diversifying a portfolio and lowering volatility and risk is possible by holding a portion of soft commodities.
What Are Soft Futures Contracts?
A soft futures contract is a legally enforceable agreement for the delivery of coffee, cocoa, frozen concentrated orange juice, cotton, and sugar at a predetermined price in the future. The commodity exchange takes care of these trades.
The contracts are listed and standardised by Intercontinental Exchange (ICE) Futures U.S., formerly known as the New York Board of Trade (NYBOT) and governed by the Commodity Futures Trading Commission with regard to quantity, quality, time, and location of delivery. Price alone is variable.
Most futures contracts are settled before delivery, indicating that most transactions are executed by speculators seeking to profit from price fluctuations.
What are the advantages of Futures Contracts?
Futures contracts can be sold short on a decline, providing market participants greater flexibility. This flexibility permits hedgers to safeguard their physical position and speculations to take a position in accordance with market expectations.
As the markets for soft commodities are traded on an exchange, the clearing services assure that there is no default risk. This means that the exchange functions as the buyer for every seller if a market participant defaults on their obligations.
How can soft commodities be traded?
Future trading is getting more popular by the day. Cocoa, Coffee, Cotton, Wheat, Orange Juice, and Sugar are some of the most popular soft commodities. Soft commodities can be traded on the spot and in futures markets.
Spot markets relate to real-time “spot” prices, allowing for quick purchases or sales at the spot price. Investors establish the spot price by submitting sell and purchase orders. In liquid markets, the current price can fluctuate every second as orders are filled and new orders join the market.
Alternatively, trading in soft commodities might occur on futures markets. People negotiate contracts to acquire or sell a commodity at a certain price in the future. Traders will typically roll over their holdings or close them off early to generate profits.
When commodities are traded via futures, the potential for high volatility and risk increases significantly. As it is often difficult for traders to precisely estimate future market prices, large variations are possible.
For many traders, trading soft spot commodities (such as Spot Wheat) is the favoured method. Spot positions don’t have an expiration date. Therefore, you can maintain your position indefinitely.
Contracts for Difference, or CFDs, are derivative instruments that include a promise to pay the gap in the worth of an underlying asset between the start and termination of the contract (often between a broker and a trader). Traders can access the soft commodities market through CFDs without the need to buy options, shares, futures, or ETFs. CFDs are leveraged products, which increases the risk of loss.
