Commodity Trading Versus Currency Trading

The financial sector is one of the most important aspects of both the national and the global economy. This is because it allows the economic players to trade products and services in an organized market.

Two of the major markets in the economy are the commodity trading and currency trading. Both of these play a big role in the economy and have some similarities as well as points on which they differ. In this article, these will be highlighted with an aim of comparing and contrasting them.

Components of the Markets

Any kind of market has components that are traded in it. This is one of the aspects in which the two markets greatly differ in.

The commodity markets are involved with the trading of goods. These goods can be categorized into four, namely:

• Energy: These include natural gas, gasoline as well as crude and heating oils.
• Livestock / Meat: Include the buying and selling of animal meat as well as live animals and their other products e.g. hides.
• Metals: These include the precious as well as non-precious metals
• Agricultural: This involves the trading of agricultural products e.g. wheat, corn, cocoa and rice.

The currency trading market or forex on the other hand is an investing strategy that involves purchasing and selling different world currencies. There are 8 major currencies that account for the largest percentage of market activity in this sector:

• United States Dollar
• United Kingdom Pound Sterling
• Japanese Yen
• Eurozone ( including France, Spain, Germany and Italy) Euro
• Swiss Franc
• Australian Dollar
• Canadian Dollar
• New Zealand Dollar

Ease of Entry

The two markets differ very greatly on this aspect- the ease with which one can get involved in the trading of the objects therein.

Starting a commodity based business is as easy as just purchasing the initial stock after obtaining the required licensing. Most require little capital and other requirements to establish it, thus, this makes it the market with the highest number of traders involved.

The currency market on the other hand is not as easy to get into. This is because it requires aspiring investors to acquire several licenses as well as have enough reserve money to be able to keep the business afloat. It is therefore dominated by commercial banks and investors who have pockets deep enough to meet all these conditions.

Market Forces

The two markets are usually affected by similar market forces of demand and supply, which determines the price of the items traded in the market.

In the commodity market, a high demand in a given commodity coupled with low supply leads to the creation of a market shortage, thus leading to a rise in the price of these items. A surplus in the items and low supply on the other hand result in lower prices.

Similarly in the forex market, a surplus in a given currency causes its value to depreciate against the other currencies while a shortage in supply makes it appreciate in value.