Commodities trading involves the buying and selling of various physical goods and raw materials, as well as the financial instruments derived from them. This field serves essential functions in ensuring a stable supply of resources and managing price risk for both producers and consumers.

Firms

Proprietary Trading Firms: These firms use their own capital to engage in commodities trading. They may specialize in specific commodities or employ various trading strategies to generate profits.
Commodities Industry Companies: Companies involved in the physical production, transportation, and marketing of commodities may engage in trading as a means of hedging their costs and managing price volatility.

Types of Commodities

Agricultural: These commodities include grains, livestock, and soft agricultural products like cotton and coffee.
Energy: Energy commodities consist of oil, natural gas, coal, and electricity contracts.
Metals: Precious metals like gold and silver, as well as industrial metals such as copper and aluminum, fall under this category.
Chemicals: Chemical commodities may include items like fertilizers, plastics, and other chemical products.
Raw Materials: Various raw materials, including wood, pulp, and minerals, are actively traded commodities.

Physical vs. Paper/Financial/Derivatives

Physical Trading

Physical trading involves the actual buying and selling of tangible commodities. In this form of trading, the commodity is physically delivered from the seller to the buyer. Due to this element, physical traders must consider various logistical aspects, including storage, transportation, and the handling of goods. They must also deal with the complexities of international trade regulations, quality assessments, and delivery timelines. The focus is on creating value through efficient supply chains and meeting the physical demand and supply of the markets.

This animated video visualizes the role here:

https://www.youtube.com/watch?v=Q78tUzYCEl8

Paper Trading

Paper trading, on the other hand, refers to trading in commodity contracts rather than the commodities themselves through derivative contracts like futures, options, and swaps. The primary purpose of paper trading is to hedge against price risks or speculate on market movements without the intention of taking physical delivery of the actual commodities. Traders in this domain leverage quantitative models and forecasting techniques to trade accordingly, with many coming from more mathematics-focused backgrounds.