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What is a soft commodity and why does it matter in trading?

There are different ways to access the world of trading. From forex, where currencies are bought and sold, to higher risk, strategic markets such as buying into new businesses, it’s possible to try different routes into investments.

One area that’s evolved over the years is stocks and shares. This is the trading of ownership of businesses and goods and attracts big names, such as Elon Musk and Oprah Winfrey. It’s a market that can apply to well-known brands and smaller companies, along with goods and products – typically referred to as commodities – including gold and metals.

But soft commodities are rising in popularity among those who want to diversify their portfolio. Read on to find out more about what these are

What is the commodity market?

Before we get into what soft commodities are, it’s important to understand what trading on the commodities market is. The commodity is a raw material or original product that’s naturally obtained or mined. The market is where these commodities are bought, sold, and traded.

What is a soft commodity?

Soft commodities tend to refer to agricultural goods that are grown and livestock. Some of the most popular include cocoa, sugar, cotton, coffee, and wheat. These, among other soft commodities, are marketable goods that have been bought and sold for hundreds, sometimes thousands of years.

To trade on these goods today, investors will check the forecasts and news just as they would with any other type of trading deal. The value of soft commodities depends on the level of demand and the prices they’re valued at fluctuate in line with the shifting markets.

What’s the difference between soft and hard commodities?

Hard and soft are two broad category names for commodity trading, but these names reflect the type of products and goods that are being bought and sold.

In the hard commodities group, you’ll find natural products that are mined or extracted from organic sources. Gold, oil, iron, and rubber are among the most common hard commodities. As well as the soft commodities listed previously, you’ll find corn, wheat, and pork among the most-commonly traded goods.

How to trade commodities

There are several ways to trade soft commodities. The route you choose will depend on your own circumstances and how well established you are as a trader.

Trading on the stocks is a good way to ease into the world of soft commodities. Here, shares in the companies that deal with soft commodities are traded.

Next, there are spot markets – or cash markets – where physical commodities are exchanged and delivery is immediate. Then there’s derivatives markets. Derivatives markets include futures and forwards, which give the new owner control at some point in the future.

There’s also the opportunity to trade CFDs on soft commodities. CFDs (contract for differences) trading is different to the futures and derivatives markets because, while traders in CFDs also follow the trends and buy and sell, traders are speculating on the price rather than expecting to see the asset at the end of the trading window. This is profiting on their predictions being right.

While there are different routes into the world of soft commodities, it’s worth exploring the options that are the most comfortable fit for you.

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