Commodities

Trading

101
A Beginner’s Roadmap
Introduction
"Commodities trading is a marathon,
not a sprint.”

Mark Fisher

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What are
Commodities?
Commodities are raw materials or primary
agricultural products that can be bought and sold.
They are broadly categorized into two types:

Hard Commodities: These are natural resources

that are mined or extracted from the earth, such as
metals, oil, gas, coal, power and minerals.

Soft Commodities: Soft commodities are perishable

items like agricultural products or livestock that are
grown or raised over time.

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What is a
Commodities
Exchange?
A commodity market is a physical or virtual
marketplace for buying, selling and trading
commodities as well as financial derivatives based
on these goods.

A commodities exchange refers both to a physical

location where the trading of commodities takes
place and to legal entities that have been formed in
order to enforce the rules for the trading of
standardized commodity contracts and related
investment products.

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Why Try
Commodities
Trading?
Commodities trading is exciting because it provides a
few opportunities:

Mix Up Your Portfolio: Commodities trading provides

a unique opportunity to diversify your investments
and spice up your portfolio.

Beat Inflation: Some commodities, like gold, can

protect your money when prices go up.

Make Some Profit: Sometimes, commodities prices

can jump all over the place. Volatile prices create
opportunities for savvy (or fortunate) investors to
capitalize and generate income.

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Are There Risks
Involved?
Commodities trading isn't all sunshine and rainbows.
There are some things to watch out for:

Wild Prices: Prices can fluctuate unpredictably, so

be ready for surprises.

Market Twists: External factors like weather, politics,

and supply/demand can affect prices.

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 A little bit of
history
Commodities trading has a long and interesting
history that spans centuries. The earliest
documented commodities trading happened way
back around 4500 to 4000 BCE in Sumer, a region in
ancient Mesopotamia (modern-day Iraq), where clay
tokens were used as a medium of exchange for
goats. These tokens represented the earliest form of
commodity futures contracts, as they specified the
amount, time, and date of delivery. In Ancient China,
rice was a common commodity that was traded and
stored in warehouses.

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The Silk Road, which connected China to the
Mediterranean, gained its fame as a trade route
where merchants exchanged treasures like silk,
spices, and metals. The rise and fall of many empires
were linked to their ability to create trading systems.
By the Middle Ages, cities like Bruges and Antwerp
became hubs where people swapped all sorts of
stuff, from textiles to spices and metals. These early
markets laid the foundation for the development of
exchanges

The 16th century ushered in a new era as sea routes

opened up to the Americas and the Far East. Gold
and silver flowed in from the New World, shaking up
the world of international trade and finance.
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The first official commodity exchange was the
London Metal Exchange (LME), which was founded
in 1877 and specialized in metal commodities. Over
time, other commodity exchanges dedicated to
specific types of commodities were established
around the world. These exchanges provided a
platform for standardized futures and options
contracts. By the late 19th and early 20th centuries,
countries had started linking their money to the value
of gold. Gold and other precious metals became even
more important in global trade.

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As time went on, commodities trading went
global, thanks to technology and the internet.
Trading floors turned into electronic platforms,
making it easier for folks to trade from anywhere.
Today, It's a big deal in the world of trade and
finance, connecting people all around the globe.
And that's how the story of commodities trading
keeps evolving, with more chapters yet to be
written.

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Commodities
Trading in the West
vs. Africa
In the west, commodities exchange and trading are
well-established and sophisticated, with a variety of
products and services available for producers,
consumers, traders, processors, and investors.
There are many exchanges that offer spot, futures,
options, and other derivatives contracts for a wide
range of commodities. These exchanges are
regulated by authorities such as the Commodity
Futures Trading Commission (CFTC) in the US or the
Financial Conduct Authority (FCA) in the UK. They
also have advanced infrastructure, technology, and
systems to ensure transparency, efficiency, and
security of transactions.

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In Africa, commodities exchange and trading are still
developing and evolving, with many challenges and
opportunities. There are only a few exchanges that
operate in Africa, such as AFEX, the Ethiopia
Commodity Exchange (ECX), or the Agricultural
Commodity Exchange for Africa (ACE) in Malawi.
These exchanges mainly offer spot contracts for
agricultural commodities such as coffee, maize,
soybean, etc. They may face issues such as lack of
standardization, liquidity, access to finance,
warehousing, logistics, etc. However, they also have
the potential to improve market access, price
discovery, risk management, quality control, and
value addition for African commodity stakeholders.

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Getting
Started

"Just do it”

Nike

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Do Your Research
Before you start trading, it's essential to gather
information about these commodities. Find out how
much of these items are available (supply), how
many people want them (demand), and whether their
prices are rising or falling. Explore different
commodities and select one that interests you and
aligns with your trading goals and risk tolerance.

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Choose a Platform
Choosing the right platform to trade is crucial. Look
for a reputable broker/platform that holds the
necessary licenses and follows regulations. Ensure
that the platform offers the specific commodity you're
interested in trading. To make an informed decision,
Compare brokers based on fees, services, and their
reputation. Ensure they have access to commodity
exchanges in Africa, such as AFEX.

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Open an Account
Once you've chosen a platform, the next step is to
open a trading account. Deposit the amount of
money you want to invest or trade with. Be prepared
to provide personal and financial information and
documents to verify your identity and comply with
anti-money laundering regulations. You will also
need to select your account's currency and
preferred payment method.

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Start Trading
Now, you can begin trading. Place your orders
through your chosen trading platform. Some
platforms have the option to buy or sell commodities
at the current market price (spot) or a predetermined
price and date in the future (futures). Additionally, you
can use options or other derivatives to manage risk
or speculate on price movements. Keep in mind the
various costs and risks involved in commodity
trading, such as margin requirements, leverage,
commissions, spreads, and other associated
expenses.

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Monitor Trades

It's essential to monitor your trading positions

regularly. Decide when you want to take profits or cut

losses. Utilize various tools and indicators to analyze

market trends and signals, aiding you in making well-

informed decisions. Continuously track your trading

performance and regularly review your trading

strategy to make necessary adjustments and

improvements.

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Definitions

"If you don't know what you're doing,

don't invest.”

Peter Lynch

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Spot Contracts
Imagine you're at a fruit market, and you want to buy
an apple right now. A spot contract is like buying that
apple on the spot, right away. Spot contracts are
used for immediate transactions of commodities,
currencies, or securities.

Exchange Traded
Commodities (ETCs):
Think of ETCs as a way to buy a share of a big
treasure chest that holds various valuable items.
Exchange traded commodities (ETCs) are securities
that track the performance of an underlying
commodity or basket of commodities.

Fixed Income Notes

When you purchase a fixed-income note, you are
essentially lending money to the issuer. In return for
your loan, the issuer promises to pay you back the
principal amount you borrowed, plus interest, at a
predetermined rate. Fixed-income notes usually
have fixed maturity dates and interest rates.
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Trade Finance Notes

Trade finance notes help businesses make their

international trades happen smoothly, and they also

make it possible for people to invest in these deals

and earn some money from them. They are a short-

term debt security.

Asset-Backed Commercial
Paper (ABCP)

Imagine you're lending money to someone, but they

give you something valuable as a guarantee. it's a

type of loan that's backed by valuable stuff, like cars,

buildings, lands or other securities. ABCP is typically

used to fund short-term financing needs and can

offer lower interest rates than unsecured

commercial paper.

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Derivatives

Derivatives are financial contracts that derive their

value from an underlying asset, such as a stock,

bond, commodity, currency, or index. They give the

right to buy or sell a commodity at a certain price and

time in the future.

Derivatives are used by traders to bet on the price

changes of commodities, or to protect themselves

from losing money if the prices go up or down

unexpectedly. There are different types of

derivatives, such as forwards, futures, options, and

swaps. Each one has its own rules and risks.

Futures Trading

Picture making a promise to buy or sell something in

the future at a set price. Futures contracts are

agreements to buy or sell an asset at a

predetermined price and date in the future. This

enables traders to lock in prices, hedge against risks,

or profit from price fluctuations of the underlying

asset.

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In a nutshell

Commodities trading can be a lucrative and exciting

investment opportunity, but it's not without risks. As a

beginner, start small, learn lots, and talk to experts if

you need help. AFEX, which is the fastest growing

Commodities Exchange in Africa, frequently has

webinars, events, spaces etc. to help you make

smart investment choices.

This guide is just the beginning. To become a

commodities trading pro, you'll need to dig deeper

into the commodities you like and create a smart

trading plan. Happy trading!

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