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I've always been told that commodities trading is not really something the individual investor should get involved in. That the stock market is really much "easier" to work with.

Now, intuitively, this doesn't make sense to me. It seems like if you hear that a major orange producing region is suffering from a drought, it's pretty easy to guess that orange prices will rise.

Trying to make those same guesses about stock prices, though, just seems much harder.

So, is it the case that it's easier to successfully trade stocks than it is to trade commodities? If so, why?

  • "always been told" implies you've been told this more than once, by more than one person. Did you ever ask why? What did all those people tell you in response? – JTP - Apologise to Monica Feb 6 '15 at 23:20
  • @JoeTaxpayer Vague responses about how it's just more "opaque" or something along those lines without much clarification. I didn't exactly take that to be much of an answer without more substantiation. That's part of the reason the (first) question is "is it harder"? – Dennis Feb 6 '15 at 23:26
  • Actually trading commodities, as opposed to derivatives of commodities, is physically difficult. What, exactly, do you plan to do with a ton of oranges while you're holding them? And how will you ship them to the purchaser when you sell them? To actually trade stocks, all you need to hold and ship is pieces of paper. – Mike Scott Feb 7 '15 at 7:53
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There are a number of ways trading stocks is easier than commodities:

  • Stocks have generally more trading activity lowering the cost to trade
  • Generally commodities trading used to involve mostly trading futures which have a number of complications. However now that ETFs have expanded this is not as much of an issue.

But the main and most important reason is that over long periods stocks in general will tend to outperform inflation as you are investing money in enterprises that generally try to become more productive over time. Whereas commodities in the long term tend to rise only at the pace of inflation (this is kind of the definition of inflation actually). So even uninformed investors that pick stocks at random will generally do better than someone doing the same in commodities even before the higher commodities trading fees are taken into account.

Also your orange example may be harder than you think. Once the news that a drought is an issue the price of oranges will almost immediately change well before the oranges come to market! So unless you can predict the drought before anyone else can you won't be able to make money this way.

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  • I agree that my orange example isn't straightforward for precisely the reason you note. But is the stock case any better in this regard? Unless you're involved in insider trading won't the market respond to any drought-like news in much the same way as in the orange case? – Dennis Feb 7 '15 at 6:37
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    @Dennis If you're trading based on news in the hope of profiting from short-term movements, you've already lost. The professionals will always be able to do it faster and better than you. Buy for the long-term, and profit from the revenue stream. Since commodities don't have a revenue stream, that's why it's hard to make money from them. – Mike Scott Feb 7 '15 at 7:59
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    You are correct, Dennis. It is no easier to profit from news with stocks though it is easier to profit buy buying and holding. The people that make money trading on news are either the ones that can analyze it faster (algos these days) or the ones that can price the impact of the news most precisely. – rhaskett Feb 8 '15 at 9:16
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One reason why you may have gotten this advice is that stocks have an expected real return over time, while commodities do not. Therefore, when gambling on individual stocks, odds are in your favor that they will ultimately go up over time. You may do better or worse than the market as a whole, but they will likely go up as the whole market, on average, rises over time. Commodities, on the other hand, have no expected real return. It is more zero-sum. In fact, after costs, a real loss should be expected on average, making gambling in here more risky.

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Its the relative leverage available to retail traders between the two. In the US one can trade equities with 2:1 leverage while with commodities the leverage can go much higher.

Combine this with the highly volatile nature of commodities, and it makes losing BIG too easy for the average trader.

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I would not argue if its more difficult, its different, and it much depends what kind of stocks you refer to, i take large caps as example.

The players are different. Companies and even govts may hedge in the commodities (futures) market while in big caps this and other entities mainly invest. (Of course there’s HFT in large caps too).

Futures often come with way higher leverage, lower spread and less commissions than stocks attracting retail and institutional speculators/HFT. Another big difference is that commodity prices react to all kind of news events (Stocks do too, but not that much and frequent), this kind of reactions big caps only do on earnings or on news directly affecting the company.

Commodities are much more volatile on geo economic / political news events. This combined with higher leverage & HFT produces astounding moves.

To sum it up, the players are different and act different than in large stocks, liquidity may be another thing.

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