‘Commodities’ are an asset class which includes some of life’s essentials. It refers to securities (rights to ownership) of tangible things like:
- Precious metals
- Industrial metals (really useful types such as aluminium and copper)
- Energy resources, i.e. coal, natural gas etc.
- ‘Softs’ – some of the good things in life like cocoa, sugar and coffee that tend to be grown…
- Mined substances like salt
- Grains, namely wheat, soybeans and corn.
Bling, food resources and energy. The commodities market is back to basics, dealing some of the first ‘assets’ that kicked off trading centuries ago. After all, we were trading in things like grain, pigs and hens before anything; else! Hundreds of years later, though plenty of things have evolved, this much hasn’t changed, and we need traders across the world to facilitate the supply and demand of commodities.
An economy wouldn’t get very far at all without these essential products to both keep it running and growing! We’ve got to eat, and countries across the world would melt down if they couldn’t power infrastructure and manufacturing.
The nature of work in the commodities market revolves around buying and selling in these types of securities. It can either take the form of physical trading, where the actual commodity is bought/sold right there and then, or derivatives trading which is to do with buying the rights to purchase a commodities at a point in the future. You know, a bit like when Cruella de Vil tries to buy the puppies before they’re born in 101 Dalmatians? You get the gist…
Breaking it down…
To get back to the juicy industry jargon, commodities are usually what’s known as the underlying asset (the asset to be bought or sold) for forms of derivative such as:
- Options – This is a contract that’s a bit like a reservation you have to pay for. It gives the option, but not an obligation, to purchase or sell an asset (in this case a commodity) at a set price before or on a certain date.
- Futures – A contract between two parties that arranges for a specified commodity to be bought and exchanged on an agreed future date and at an agreed price.
- Warrants – Similar to futures, except the agreement allows the buy side to purchase the specified commodity at an agreed price within a specific time frame rather than on at a particular date.
- Exchange-traded commodities – These ‘ETCs’ are commodities funds (Exchange Traded Funds – ETFs) traded on the stock exchange.
The bare necessities of commodities…
Professionals in this industry generally work on the virtual markets, so you won’t necessarily be expected to stick on your wellies and head to the farm to check out the goods before you deal in it (though brokers will sometimes visit suppliers). There are brokers and traders who specialise in commodities for investment banks, brokerage firms and specialised or more general investment firms.
Commodity brokers at brokerage firms and investment banks will earn a commission from both buying and selling commodities on behalf of their clients. It’s not just simply buying and selling: on a day-to-day basis, these guys monitor the international markets, liaise (at times face-to-face) with their clients to provide recommendations on what to buy and sell, negotiate prices and also liaise with logistics and shipping companies to help arrange transportation for commodities on behalf of their clients.
Commodities are also a classic asset class to include when asset managers diversify their portfolios in an aim to ‘hedge’, or mitigate risk levels. There will also be financial analysis roles, with analysts, technical teams and quants working to monitor the markets and price assets. This is a market that’s prone to drastic fluctuations owing to how sensitive the assets being traded are to environmental, political factors etc. As such, it’s what’s known in the ‘volatile’ market, so be prepared for things to chop and change quickly – and not always when it’s expected!
The commodities market offers potentially very lucrative careers for graduates. If you’ve got a strong finance related degree then you’ll certainly tick on of the early boxes! Work experience is really important if you want to secure a career in this industry.