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The price of natural resources such as crude oil, lumber, cotton or gold can have a dramatic effect on a company's profit and its share price, depending on how much it produces or consumes such commodities.
Similarly, foreign exchange rates can affect how much a company pays for the goods it imports or consumes and earns for the goods it exports or produces. This too will affect its profit.
Commodity and currency markets are very volatile – even more so than stock markets – and price changes can be very fast.
Shares traders should therefore keep a constant eye on both markets.
Companies that actually produce a commodity, such as miners or OIL companies, have perhaps the most direct exposure to commodity prices.
If the price of a company's product increases, it will probably earn more profit, which should help increase the value of its shares. A big increase in the price of crude OIL, for example, will tend to push up the shares of OIL companies dramatically.
A company that uses a lot of OIL to produce its goods will probably earn less profit if the price of crude rises and its costs increase. Shares in plastic producers, for example, tend to suffer if OIL prices rise.
Further down the chain, companies that use a lot of plastic to produce their goods – for example food producers that shrink-wrap their products in plastic – will also see their profit margins shrink if the price of OIL, and therefore plastic, rises. This could push down their share price.
Companies can choose to pass on their higher costs to their customers in the form of higher prices. This may then reduce demand for their products and hurt their earnings or share price that way.
Conversely of course, if the price of a commodity that a company uses a lot of drops, its costs can fall and its earnings and share price may rise, while the company that produces that commodity could see its earnings and share price fall.
For investors who track or trade stock market indices, it is also important to note that big mining and natural resource companies account for a very large chunk of the total value of indices such as the FTSE 100.
Any change in commodity prices will therefore tend to produce big changes in the overall level of stock markets, and this can affect traders' risk appetite for shares in general, regardless of whether the companies involved produce commodities.
Shares traders need to think laterally when they monitor commodity prices as the relationship between some natural resources and the companies' shares they are trading may not always be obvious.
Here is a list of some key commodities and the kind of companies they could affect:
Virtually all companies are exposed to foreign exchange markets, and this will affect their profits and their share price.
Companies with the most obvious exposures are firms that directly import or export a lot of goods.
If, for example, a UK-based company makes car parts and exports them to Europe, it will probably be paid for those parts in euros. Many of its costs however – for example wages for its workers, energy bills and the cost of renting or buying premises – will be payable in pound sterling. It will probably also import a lot of the metal or rubber it uses to make cars from overseas and may pay for these in US dollars.
If the price of US dollar rises against the pound, the company's earnings will probably fall and so could its share price. If the price of euros rise against pound sterling, its earnings will probably rise and so could its share price.
Even companies that do not directly import or export goods will be affected by foreign exchange rates.
For example, a retailer in the UK may buy many of the products it sells from domestic wholesalers or manufacturers, rather than importing them itself.
Even if the entire product it is selling – for example, a mobile telephone – has not been produced overseas, it is likely that many of its parts will have been.
If, for example, the pound sterling has weakened against the currency of the country that produced those parts, for example South Korea or Taiwan, this will make the product more expensive in the UK.
This could dent demand among UK consumers for that telephone, hurting the earnings and share price of the retailers that sell it.
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