What is a 'Commodity Trader'

A commodity trader is an individual or business entity that focuses on investing in physical substances like oil, gold or grains and other crops. Most often these traders are dealing in raw materials used at the beginning of the production value chain, such as copper for construction or grains for animal feed. These traders take positions based on forecasted economic trends or arbitrage opportunities in the commodity markets. Oil and gold are two of the most commonly traded commodities, but markets exist for cotton, wheat, sugar, cattle, pork bellies, lumber, silver and other precious metals.

BREAKING DOWN 'Commodity Trader'

There are several different types of commodity traders in the market. Some operate independently, trading on major exchanges such as the New York Mercantile Exchange. Others work for large commodity producers such as the international oil companies. The job of these traders is to secure the best price for the producer while simultaneously supplying competitive bids to customers. Still other commodity traders work solely as broker-dealers. These traders tend to work for large independent companies such as Vitol or Trafigura, creating a deep and liquid international commodity market. Other commodity traders act as speculators, trying to make a profit on small movements in commodity prices. These commodity traders tend not to have a need for the specific asset they are trading, but gain exposure through forward and future contracts. Contracts are usually hedged, and actual delivery is a seldom occurrence.

​Commodity traders need to be able to react quickly to market moving events. Examples include natural disasters that can impact different commodity markets at the same time. For example, a hurricane can wipe out sugar or orange crops, sending these prices up on reduced supply. At the same time, lumber prices can shoot up on anticipation of new building and reconstruction costs. Commodity traders need to be fast enough to react to such quick developments in order to trade profitably. Slow reactions will not be rewarded after the price has already moved.

Limitations of a Commodity Trader

A commodity trader faces certain limitations that other types of traders do not. For example, commodity traders generate a total return solely from the price movement of the commodity they are trading. Unlike stock or bond traders, who can earn a dividend or interest payment from the asset they buy, commodity traders do not receive such periodic cash flows. This means that to generate a positive return the commodity trader needs to be certain about the price direction of the commodity. A bond trader can generate a positive total return even if the price of the bond doesn't move because of the periodic cash flows that come from interest payments.

RELATED TERMS
  1. Commodity Market

    The commodity market is a physical or virtual marketplace for ...
  2. Commodity Price Risk

    Commodity price risk is price uncertainty that adversely impacts ...
  3. Small Trader

    A small trader has buying or trading activities which are below ...
  4. Cash Price

    The cash price is the actual amount of money that is exchanged ...
  5. Against Actual

    Against actual is an order between two traders in which the traders ...
  6. Commodities Exchange

    A commodities exchange is an legal entity that determines and ...
Related Articles
  1. Financial Advisor

    When Will it Be Safe to Buy Commodities?

    When will it be safe to buy commodities (and which ones)? A closer look at the commodities markets and how they move.
  2. Investing

    All About Liquid Commodities

    You might hear 'liquid commodities' and think of an auction, but they're actually a high-volume, fast paced financial product suitable for day traders.
  3. Investing

    Top 3 Commodities ETFs for 2018

    Commodities ETFs are a great way for investors to jump into the sector while avoiding some of the volatility that tends to befall the individual stocks. Here are three with momentum.
  4. Investing

    3 Reasons to Invest in Discounted Commodities

    Though they're selling at depressed prices, there are several reasons that it could make sense to invest in commodities now.
  5. Investing

    These 3 ETFs Suggest Commodities Are Headed Lower (COMT,CCX,DBC)

    The charts of these three exchange traded funds suggest that commodities are stuck in a downtrend and it doesn't look like it will reverse any time soon.
  6. Trading

    Traders Look to Trump to Send Commodities Higher

    Trump's plans to reinvest in factories across the U.S. suggests that active traders will be turning their attention to exchange-traded funds that track commodities.
  7. Personal Finance

    A Day in the Life of a Day Trader

    Day trading has many advantages, and while we often hear about these perks, it's important to realize that day trading is hard work.
  8. Investing

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
  9. Investing

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
RELATED FAQS
  1. How can electricity be traded as a commodity by an individual investor?

    Learn the characteristics unique to electricity trading as a commodity and how investors can trade electricity futures on ... Read Answer >>
  2. Can mutual funds invest in options and futures? (RYMBX, GATEX)

    Learn how mutual funds invest in stock options and futures to benefit from commodities price swings and hedge their portfolio ... Read Answer >>
Trading Center