Updated on July 23, 2024

August 8, 2022

If you are going to trade in cotton, you should definitely study something about it first. Commodity trading is not just like that. Not everyone is successful in this field. So how do you invest in cotton in such a way that it pays off for you? We’ll give you a few tips to help you be as successful as possible when trading cotton. So let’s go!

Cotton – properties and uses

Cotton is an agricultural commodity. It is a fine white substance that is obtained from the seeds of plants. Specifically, cotton farmers. Cotton consists of fine fibers that are then processed in spinning mills. There they are made into yarn. These yarns consist either entirely of cotton or are mixed with other fibers. Roughly half of the cases involve artificial fibers. For example, about  polyester .

Cotton and textile products

So what cotton is used for is clear. It is used to produce substances. Cotton has specific abilities that make it popular in the production of various types of textiles. Cotton is a natural material, which gives it an advantage over artificial fibers in the field of bedding and clothing. The yarn made of cotton is soft and pleasant to the touch. And this is one of its many advantages.

Cotton yarns are further processed as needed. Clothes, home textiles and bed linen are sewn from them. And sewing threads are also made from it. The material, which is made of pure cotton, is breathable, absorbs sweat well and is soft and pliable. This is why you should go for a product made of cotton when shopping.

In the textile industry, manufacturers will also use it for other reasons. And that is its chemical properties. Among the advantages of cotton is that it accepts color well and, if it is of sufficient quality, it does not form lint. It also tolerates washing and ironing well. By absorbing moisture well, the wet fiber is more durable. And that’s why you don’t have to take such care when washing, as is the case with wool, for example. In addition, it also withstands high temperatures when ironing.

Of course, like everything else, we also find a few flies on cotton. Among them is that it is a material that likes to shrink when washed at higher temperatures. So pay attention to that so you don’t get too surprised when you take the laundry out of the washing machine. Another characteristic of cotton is that it is a squishy material that is not very flexible on its own.

Use in medicine

The fact that cotton is a material that absorbs well and is also natural means that it is also widely used in the healthcare industry. Products made of cotton are harmless to health and can be tolerated by sensitive skin without any problems. Therefore, bandages and many other medical aids are also made from it. It can also be used to make textiles for babies.

History of cotton

The history of cotton is indeed long and relatively well known. According to archaeological findings, people have been growing it for the production of textiles for thousands of years before Christ. Especially in Egypt, India, Mexico and Pakistan. But also in China. This is proven by the cotton textiles found on the territory of these states, which were dated to this time. And also old spinning wheels for processing cotton fibers.

Cotton has even become an important raw material for international trade. The first written mention of the international trade in cotton comes from the 7th century. BC That’s when India exported its cotton to Iraq. Subsequently, Europe and China also traded with cotton.

Because of its properties, cotton production continued to grow. And it continues to grow. Currently, the leading producers of cotton are China, India and the USA. And its importance is also evidenced by the fact that in 2019 the International Cotton Day was celebrated for the first time. It falls on October 7.

How to trade cotton

Now you know everything you need to know about cotton. So let’s see how cotton can be traded.

Physical cotton

If you need a certain amount of cotton to produce a product, then of course you can trade cotton on the exchange. In such cases, trading is often done through futures or options. It is advantageous for both parties, as it insures against a significant decrease or, on the contrary, an increase in the price of cotton.

In both cases, the point is that two parties enter into a contract, i.e. a contract, that on a specific date a pre-determined amount of cotton will be exchanged for a pre-determined price. The advantage of options is that you can still think about making this trade until the given date.

Cotton CFD trading

But if you don’t need to own the cotton directly, then there is another option. And that is trading through CFD contracts. In this type of trading, you are not really buying cotton. You don’t have to worry about transporting the cotton or storing it. And this is where the greatest advantage of CFD trading lies

The point is that you are speculating on the future development of the price level of cotton. So, for example, in your market research, you find that according to your estimates, the price of cotton should increase in the next period. And so you enter a buying position. Or, on the contrary, you will estimate that the price of cotton will go down, so you will enter a sell position.

And then you will just have to wait to see if you guessed the price development of cotton correctly or not. Depending on whether you guessed correctly, you will pay the broker or the broker will pay you. So you either make money or lose money on the cotton trade. It all depends on whether your guess was correct.

How to begin?

The vast majority of merchants do not want to actually own the cotton. But only to earn from its trading. And that is why CFD trading is very widespread. How to start with it? There is nothing difficult about it. There are plenty of online brokers that allow you to trade cotton via CFDs. You just have to choose between them. But choose carefully. Not everyone will offer you the same conditions for trading. And in addition, you will find a number of fraudsters among them. Therefore, first carefully study the reviews.

While searching for a suitable broker, educate yourself. Your speculation on the development of the price level should certainly not be a random tip. You don’t play sports. Ideally, as a trader, you should be familiar with the market situation. And based on that, then estimate in which direction the price of cotton will develop.

A demo account is also useful for education. It is a practice account that brokers offer quite regularly today. Of course, there are exceptions among them. After you open this demo account with any broker, your account will be credited with a financial amount. How big the financial amount will be and in what currency it will be depends on the chosen broker. However, these finances are only virtual. And you have them available for you to practice trading with.

Thanks to the demo account, you can test whether the given broker and its fees suit you. But most of all, you can familiarize yourself with its trading platform, test your market analysis and then practice trading itself. So when you start trading in earnest, you’ll already know what you’re getting into. And it pays off, don’t you think?

Beware of risks

Of course, no trading is ever risk-free. And cotton trading is no different. CFD contracts are considered very risky. Why? Because of financial leverage. Because when you enter a certain trade, you don’t have to invest in it the amount of money that will match your order. The broker will finance the rest for you. So you’re actually making a deal that’s several times bigger than you could afford.

However, the broker doesn’t do it just like that. He wants something in return. And that lies precisely in the fact that at such a moment you are trading with financial leverage. What exactly does that mean? Financial leverage multiplies your final earnings. But also gaps. So, on the one hand, you can earn handsomely with CFD trading. Earn multiple times. On the other hand, you can make several times what you put into the store.

What affects the price of cotton

What factors should you monitor if you are trading cotton? There aren’t many of them. Basically, cotton is not a commodity in short supply. It is a plant that is produced by several countries. It is therefore not customary for cotton to be subject to rapid and significant price changes. Nevertheless, there are indicators that can influence the development of cotton value.

Among these factors is the fact that cotton is a seasonal commodity. There simply isn’t enough of it on the market. Harvest time is logically reflected in this. Despite the harvest, there is the biggest shortage of cotton. After harvest, surplus again. Its supplies are again gradually narrowing until the time of harvest comes again.

However, the price of cotton can also be affected by the weather. This can be reflected in how big the harvest will be. And the size of the harvest will of course be reflected in the ratio between supply and demand. And the value of this commodity will then develop accordingly.

Cotton – current online chart

See how the value of cotton evolves over time. The year 2010, when the value of cotton rose sharply, will certainly attract your attention. The reason for such a high price of cotton was the too cold weather in China. The remaining producers were not able to replace the damaged Chinese cotton crop in the given year.

Development of interest in the commodity

Demand for this commodity is primarily determined by its supply. As already mentioned, it changes with the time that has passed since the harvest.

Cotton – Summary

Cotton trading can pay off in a shorter time frame. In the long term, the price of cotton does not change much. In general, however, we can say that it is a relatively safe investment. And that is precisely because significant movements in the price level are not expected. The situation is different, for example, with investments in shares or bonds.