Interested in the commodity trading market and exchanges in Nigeria? This article will explain how it works.
What are commodities
When we talk about commodities, it mainly refers to unprocessed goods that can be resold after processing. Commodities in Nigeria are most agricultural produce like yam, rice, beans, etc, or natural resources like gold, silver, lead, etc. Unlike some other product markets, branding does not affect the value of commodities.
There are 4 major types of commodities in Nigeria and they include;
Trading in commodity markets is carried out similarly to that in local markets. A buyer and seller bargain and agree on a price. The transaction is handled by a commodity exchange.
What is a commodity exchange?
Commodity exchanges are companies that facilitate the trading and exchanging of commodities from a seller to buyer. These exchanges feature a market were commodity sellers can list their goods for prospective buyers to find them.
There are several commodity exchange companies in Nigeria and some top ones are;
Abuja Securities and Commodity Exchange (ASCE), based in Abuja, Nigeria
Lagos Commodities and Futures Exchange (LCFE), based in Lagos
AFEX Commodities Exchange Limited (AFEX), based in Abuja
The commodity market in Nigeria is regulated by the Securities and Exchange Commission (SEC). Hence, for a commodity exchange to operate legally, they must register and obtain and SEC license.
How to trade commodities in Nigeria
The commodity market in Nigeria is an open one and thanks to regulation, it is transparent and organized. Trading commodities in this market is easy, it is very similar to trading CFDs (Contract For Difference).
Firstly, you need to register with SEC-licensed commodity exchange. Then, you speculate and place an ideal future contract or put a contract.
Take gold for example. If one ounce of gold is selling for N600,000 today, you can speculate that the price will increase in the future, possibly because of an increase in demand.
So you place a future contract that enables you to purchase gold for that day’s price in the future. Should the price of a gold ounce rise to N800,000, you’ll be able to purchase it for N600,000, sell it and make N200,000 profit. If the price falls to N400,000, you’ll have to still purchase for N600,000 hence you’ll be making a N200,000 loss.
The same applies to the converse. If you speculate that the price of a gold ounce will fall in the future, possibly because of an increase in supply, you can place a put contract. This put contract allows you to sell on that day’s price. Should the price of a gold ounce fall from N600,000 to N400,000, you can still sell at N600,000. If the price increases to N800,000, you still sell at N600,000, losing out N200,000.
The commodity trading and market are not a difficult one but it all about action. As an investor, you have to be able to make informed decisions if you want to make returns.