​Many of the basic principles to trading FX, shares and commodities are similar. Financial tools such as options, forwards, futures, etc. can be used to trade each. The commodity market is both a physical and a cash-settled market. There are approximately 50 major commodity markets worldwide that facilitate investment trade in approximately 100 primary commodities.

 

The stock market

 

‘The Stock Market’ has been around for a very long time. It is a place where stocks (or otherwise known as shares) can be purchased. It is an aggregation of buyers and sellers trading ownership of companies via an exchange. 

A share is a slice of ownership in a company and when that company decides to go public (known as an IPO – Initial Public Offering), anybody is able to purchase shares in the company in the ‘secondary market.’ The primary market is where investors have direct interaction with the company to purchase shares. 

Just like any market of supply and demand, if there are more buyers for a particular share, the price is pushed up. There are several factors influencing share prices and are not always very transparent.

 

For example if the CEO of a large company was found to be performing illegal activity getting the company fined millions of dollars, we could assume investors would want to get rid of their shares, causing prices to fall dramatically. Share prices are influenced by a vast range of factors which make them sometimes difficult to trade. Company share prices are easier to manipulate by the people running the company. General market sentiment as well as company financials also impacts the direction of share prices.

Shares are traded on exchanges with most developed economies having at least one exchange where a list of companies will be registered. The U.S. has the most well-known exchanges in the world; Dow Jones, S&P 500 and NASDAQ are the top three. Other countries also have their own such as Australia’s ASX, the London Stock Exchange (LSE) and so on. Every working day these markets open at a set time when trading commences and close at a set time when trading stops. Unlike FX trading, these markets only trade at limited hours and anything outside of those hours requires orders to buy/sell for when the market re-opens.

 

FX platforms allow traders to also be able to trade on movements of stock indices, which represents the overall stock exchange. 

 

Stock indices

A stock index (indices) are a good way of representing overall health of an equity market. It is a weighted index to the market capitalisation of individual company shares, coming to a final number. FX traders also look stock market directions as indices show generalised movements with relationships to the currency market in those regions.

The name of the index often gives away home many of the top shares are used to determine the index value (i.e. DAX 30 uses the top 30 companies on the exchange). Some of the larger global indices are:

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• Dow Jones Industrial Average (DJIA) - US

• S&P 500 - US

• NASDAQ - US

• FTSE 100 - UK

• DAX 30 - Germany

• CAC 40 - France

• Euro Stoxx 50 - Euro Zone

• Nikkei 225 - Japan

• Hang Seng - Honk Kong

• ASX 200 - Australia

 

Commodities

In economics, the term ‘Commodities’ refers to a "marketable item produced to satisfy wants and needs of goods and services and are the basic building blocks of the global economy. These are extracted from their natural state with a minimum standard for sale in the market place."

Like the stock market, commodities are traded on an exchange regularly with derivative products such as futures, forwards or options. FX platforms also have the ability to trade commodities. The two most commonly traded commodities are energy and metals industries. Energy commodities include oil and natural gas while metals can be precious such as gold, silver, platinum, etc. or base metals such as copper. Consumable products such as coffee, corn, wheat and even orange juice can also be traded on.

 

Commodities are classified as either hard or soft and prices are not only driven by supply and demand, weather and economic events also have an influence. If the overall stockpile of available oil barrels is in heavy surplus (over-supply), the price would expect to go down. Alternatively, if the borders to one of the world's biggest oil suppliers closed, the price of oil would expect to rise. Seasonal events also play a part in many soft commodities where weather can wipe out multiple crops, raising the price due to the reduction in supply.

 

Stock and commodity market risks

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Risks to be aware of trading the stock market

A stock exchange is also a company, that lists the other individual companies allowing investors to trade them. All trade executions therefore go through this exchange and price manipulation of spreads or increasing transaction costs could be altered.

Company decisions are controlled by a limited number of people. These can be executive committees or the board. Individual share prices can be manipulated a lot easier by a small group of people for a company, compared to a global market such as forex. Company board decide on the direction of the company and will often impact the price of shares. The ability to know certain information before publicly announced allows individuals to find ways on trading the information for gain. This offense is known as insider trading and can result in many years in prison.

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Liquidity plays a large role when share trading. How liquid a share is depends on the number of buyers and sellers in the market for that share. A trader may wish to buy a certain number of shares however the market does not have enough sellers. This happens more with smaller companies and not usually a problem on the larger blue chip organisations. Lower liquidity tends to widen the spread between buy and sell prices.

General trends of the sector the company is in can strongly influence individual share prices. It may be unwise to purchase shares in a bank stock when the financial and banking sector is falling overall. 

Overall sector, company financials, company news/announcements as well as technical charting analysis all play a part when deciding what company to buy shares in. Some negative light on share trading includes:

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• Psychological factors play a strong role in exaggerated price movements from over-reactions. Excessive optimism or pessimism may drive prices unduly high or low.

• Much debate exists to determine whether stock markets are generally efficient

• The heavy speculative nature of trading and financial markets spawns a lot of criticism and comparison to gambling for those looking to make quick money.

 

Risks to be aware of trading the commodity market

Given the large number of different commodities that exist, with the number of different products commonly used to trade them, and costs of storing and receiving shipments, certain complexities can often arise trading commodities.

Some commodities are heavily tied to other markets such as the forex market. Certain countries produce commodities and if the currency fluctuates, the supply and demand of the product sold to overseas to buyers is also likely to fluctuate.

Traders on common retail trading platforms typically don't need to worry about physical/actual ownership of the commodity. The ability to trade on price movements of precious metals, energies and some soft commodities is easy. These are replicated at a spot price with gold and silver typically being available without any contract dates. Other commodities are typically traded on the futures and options markets. 

Storms and weather are a big player in consumable commodities such as oranges, sugar, corn, cotton, etc. Large droughts or excessive rain for mass global suppliers of a certain commodity can impact supply and drives price fluctuation. These fundamental opportunities can cause large volatility, creating large tradeable movements.

Certain commodity prices such as oil often are subject to political issues due to the geographical distribution of key suppliers. Only a limited number of countries have access to large supplies to distribute world-wide. Intergovernmental organisations such as OPEC (Organisation of the Petroleum Exporting Countries) as of 2015 accounted for almost half of global oil production and more than 70 percent of the world’s proven oil reserves. This gives the 14 member nations of OPEC an incredible influence on prices of oil.