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What's the Difference Between a Commodities Broker & a Trader?

by Clayton Browne

Modern commodities markets are 24-hour operations, trading energy products, metals and agricultural products in several dozen markets all across the globe. Prices for commodities are established based on supply and demand, so if there is a report that China's usually strong industrial production has dropped significantly this month, there is likely to be an accompanying drop in the price of crude oil and iron ore, for example. Commodity traders are participants in commodity markets and commodity brokers are employees of commodity trading companies.

Commodity Markets

Buyers can purchase commodities at either the current or "spot" price or can purchase futures contracts to buy the commodities at a particular price at a specific future point in time. While businesses are most commonly involved in commodities markets to acquire the resources they need to produce their products at the best possible price, traders and investors buy commodities futures contracts as speculative investments.

Commodity Brokers

Commodity brokers work for commodity trading firms. They work closely with individuals and businesses who want to buy or sell commodities. The job of a commodity broker is in general to inform traders and other clients regarding commodity markets, and in specific to submit a client's buy or sell orders to the market. Many commodity brokers work on a salary plus commission basis, which means the more and larger transactions they originate, the more they get paid.

Commodity Traders

Commodity traders are commodity market participants trying to make money by anticipating whether the price of a specific commodity will go up or down over a particular time period. Traders typically purchase futures contracts when they anticipate some news or change in macro-economic trend will cause a specific commodity or category of commodities to increase or decease significantly in price over a relatively short period of time.

Example Commodity Trade

Let's say, for example, that a commodities trader bought a six-months out gold futures contract for 10 ounces of gold for $13,000 when the current price of gold was $1250 per ounce. The price of gold increased to $1350 per ounce after three months, so the value of the futures contract increased to around $14,000. The trader could sell and book the profits, or if he thought the trend was still up, hold on and sell anytime in the next three months before the contract expires. Note that commodity traders often use leverage, which means they only have to put up a small fraction of the full cost of the underlying commodity when buying the futures contract.

About the Author

Clayton Browne has been writing professionally since 1994. He has written and edited everything from science fiction to semiconductor patents to dissertations in linguistics, having worked for Holt, Rinehart & Winston, Steck-Vaughn and The Psychological Corp. Browne has a Master of Science in linguistic anthropology from the University of Wisconsin-Milwaukee.

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