What is commodity trading? A beginner’s guide for Kenya-based traders

Commodity trading is on the rise in Kenya, as more traders seek to tap into global markets and speculate on the price of everything, from oil and wheat to gold and silver. But what is commodity trading?

Introduction to commodity trading

Commodity trading refers to the buying and selling of raw materials that serve as the foundation of the manufacturing industry. A trader may buy gold or silver if they predict that current or future geopolitical events will increase prices, then sell them when that increase occurs. 

What are commodities?

Commodities are raw materials that are grown, raised, mined, or extracted, often to be manufactured into consumer products. 

They are categorized as:

• Hard commodities: Mined or extracted materials like metals and oil.
• Soft commodities: Agricultural products such as wheat and livestock.

Hard commodities are typically less volatile than soft ones, as their supply is not as heavily affected by bad weather and other factors.

Types of commodities traded globally

Global markets span a wide range of commodities, including crude oil, natural gas, gold, silver, copper, wheat, and soybeans. 

Most of these commodities are traded in Kenyan markets, with an emphasis on agricultural products like wheat, cotton, rice, and coffee.

How does commodity trading work?

Commodity markets have existed for as long as humans have grown, mined, and extracted goods on a large scale. Sellers would take their stock to the market to find buyers, who would then produce goods for the consumer market.

However, modern traders aren’t interested in stockpiling bushels of wheat, so what is commodity trading in a modern context, and how does it work?

Physical vs derivatives trading

Commodity markets are either spot markets or derivatives markets.

In a spot market, a commodity is traded for immediate delivery at its spot price,  a uniform amount that accounts for varying exchange rates. For example, a chain of coffee shops may purchase large quantities of coffee beans for delivery to its stores.

Derivatives markets allow speculators to profit from the future price of a commodity without taking physical ownership. They use contracts such as futures and options to trade the current value for future settlement or delivery.

A farmer may agree to sell a future corn harvest at 5 USD a bushel, to be delivered on a specified date. If the price drops to 4 USD, the farmer gets a higher price than they would have if they waited. If a speculator purchased that contract, they can sell when the price rises and earn a profit of 1 USD a bushel without taking delivery. A CFD (Contract for Difference), as offered on trading platforms like Exness, is a type of derivative market option. This contract between the broker and the trader allows them to speculate on the price movement of an asset without owning it. For example, a trader might open a CFD position on oil when it is at 80 USD per barrel. If the price rises to 85 USD, they can close the trade and earn 5 USD per barrel based on the price difference. CFDs are a flexible, margin-based way to engage in the commodities market.

Spot vs futures vs options vs CFD

We’ve already addressed how physical markets differ from derivatives, but to fully address the question of “what is commodity trading?”, it warrants a closer look:

• Spot contracts: Payment and delivery are confirmed immediately and are based on the asset’s spot price.
• Futures contracts: A speculative contract that sets a price and date of delivery for a future transaction.
• Options contracts: Derivatives contracts that provide the buyer with the right to buy/sell an asset. Call options give them the right to buy, while put options give them the right to sell. Options are typically used for hedging or speculation.
• Contract for difference: A CFD allows traders to speculate on the price movement of commodities without owning them.

Why do people trade commodities?

We know what commodity trading is, and we’ve discussed how it works, but why would people be interested in trading agricultural products and metals they have no desire to own?

It’s all about speculation. Using leverage, traders speculate on the price of commodities and hope to profit when those prices rise. As commodities are raw materials essential for the manufacture of everything from food and drink to machinery and jewelry, they are subject to major price swings resulting from consumer trends, economic news, geopolitical events, and shortages. 

For traders who know where to look and when to act, that volatility presents a unique opportunity.

Benefits of commodity trading

• They offer some protection against inflation: Inflation is an increase in price and a decrease in purchasing power. Price increases are often tied to commodities, as they supply the wheat that bakes the bread and the oil/gas that powers industry. Commodities, therefore, offer some protection against such events. As prices rise, so will the value of the commodity.
• They can hedge against global tensions: War, tariffs, riots, and political unrest can disrupt the supply chain and raise commodity prices. Such events may inversely impact the stock market and other investments. If a trader has commodities in their portfolio, it may protect against losses elsewhere.
• They allow for high-leverage contracts: Leverage amplifies both profits and losses, giving traders more clout in the market. For example, 1:100 leverage means that a trader with 1,000 USD can hold a position worth 100,000 USD. Leverage trades are very common in the commodities market, but while leverage increases the potential reward, it also increases the risk. 
• They provide traders with diversification: Commodity prices often move inversely to stocks and bonds. If the price of raw materials increases, manufacturing becomes more expensive, impacting company profits, which in turn could affect stock prices. But those high commodity prices greatly favor traders who have added commodities to their portfolios.

Common risks to consider

• They are highly volatile: Commodities markets are volatile. As any guide to commodity trading will tell you, various factors influence the price. This makes it harder for traders to analyze the market and speculate on its direction.
• Commodity-only trades aren’t diverse: Commodities are heavily focused on specific industries, including mining and agriculture. While they can diversify a portfolio rich in stocks, bonds, and other investments, commodities are not diverse on their own.
• Speculation can create significant price fluctuations: Volatile markets attract speculators, and if they all act at the same time, it can lead to significant price swings.
• They may not be suitable for eco-conscious traders: Traders worrying about their impact on the environment may struggle with the prospect of speculating in mining and agricultural sectors, especially as large market movements can impact supply and demand and may encourage farmers and mining companies to produce larger quantities.

Is commodity trading available in Kenya?

Kenya has an emerging commodity trading market, helped by the expansion of the Nairobi Securities Exchange and the creation of the Kenya National Multi Commodity Exchange (KOMEX). This has led to an increase in interest among Kenyans in commodity trading.

Local platforms and access

KOMEX is being spearheaded by several key government entities, including the Ministry of Agriculture and Livestock Development, the Ministry of Investments, Trade and Industry (MITI), the National Cereals and Produce Board (NCPB), and the Capital Markets Authority (CMA). It is designed to provide farmers with easy access to sellers while giving traders an opportunity to buy and sell commodities within Kenya.

On the other hand, Kenyan retail traders looking for a straightforward way to trade commodities can use platforms like Exness. Licensed by the Capital Markets Authority and used by over 1 million traders worldwide. This regulated platform offers access to various CFD commodity options, including metals and agricultural products, as well as stocks and currency pairs.

Regulation and legal considerations

Regulation not only ensures that platforms are safe and fair, but it also provides accountability. Traders have somewhere to turn if anything untoward happens. If they use unregulated brokers, however, there are no such guarantees, and the trader’s money and safety are at risk.

In addition to asking, What is commodity trading? Aspiring traders should also learn the rules and regulations and ensure they only trade with regulated brokers.

How to start CFD commodity trading in Kenya

You’ve learned all you need to know about commodity trading, and you’ve discovered why people trade commodities. The only thing left to do is start trading yourself:

Step 1 – Choose a platform

Many trading platforms offer the same trading instruments and functionality, but they don’t offer the same level of security or regulation.

Look for a platform regulated by the Capital Markets Authority, which is the regulatory body in Kenya. Exness, for example, is registered in Kenya and licensed as a non-dealing online foreign exchange broker. This means that the platform adheres to the regulator’s strict standards and operates a safe and fair platform.

Step 2 – Learn about the instruments

We have covered the basics of commodity trading in this guide, but there is still more to learn. In addition to the many options listed on the commodities page, trading platforms like Exness offer access to various other trading instruments, as well as charts, patterns, and analytical tools.

The more you learn, the easier it becomes. So, read as many guides as you can, discover how chart patterns work, and learn all about the trading instruments you choose. In addition to commodities, trading instruments include:

• Stocks represent shares in a company and move up and down based on its success and profitability.
• Currencies are listed in pairs, such as GBPUSD, and reflect how one currency performs in comparison to another.
• Indices measure the success of a group of stocks.

Step 3 – Open and fund your account

To register for an account, you must verify an email address and phone number. You can then fund your account using a variety of payment methods or opt for a risk-free demo account to familiarize yourself with the platform.

Most platforms won’t charge you for funding your account, but you could face charges from your bank, card provider, or payment network, depending on the method that you use. Other things to consider include:

• Minimum deposit: The lowest amount you can deposit. You need to meet or exceed this amount to add funds to your account.
• Withdrawal options: You don’t need to use the same method to deposit that you use to withdraw, but keep an alternative on hand if your chosen method doesn’t accept withdrawals.
• Your capital: Always trade within your means. Don’t deposit more than you can afford to lose, and never assume that your capital will be safe, as all trading carries a capital risk.

Step 4 – Start with a demo account or low-risk trades

Risk is inherent in all trading instruments, including commodities. If you’re new to trading, you could make costly mistakes that lead to sizable capital loss. Even if you don’t make an outright mistake, the lack of experience and platform knowledge could lead to suboptimal trading. 

In a world where every dollar and decimal point matters, that’s something you want to avoid.

So, before committing to a real money deposit, consider opening a demo trading account. You’ll be given a balance of virtual funds that you can use just like the real thing. You can trade all of the commodities and other instruments on the platform, and you’ll also have access to charts and various indicators, as well as stop loss and take profit orders.

The only difference is that you won’t lose any real money if something goes wrong, and you won’t gain any money if you get it right. However, you’ll gain invaluable knowledge that will help you when you eventually switch to a real money account.

If the idea of a demo account isn’t appealing, keep your initial investments low until you get a feel for the platform and for commodities trading in general.