What are commodities and how do you trade them?

What are commodities?

Commodities are naturally occurring materials or goods that are collected and processed for use in human activity – such as oil, sugar and precious metals. They form the basis of our economy, because the raw materials are needed for the production of food, energy and clothing.

Commodities are often mass-produced and standardised for quality and quantity, which means they’re priced the same regardless of who produced them.

Commodities are bought and sold on exchanges, like stocks. Well-known exchanges include the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX) and London Metal Exchange (LME).

Choose what commodity you want to trade

Choose from over 35 commodities or a range of commodity-linked stocks and ETFs with us.

1. Hard commodities

These are natural resources that are mined or extracted from the earth – such as gold, oil, copper and natural gas

2. Soft commodities

These commodities are grown and harvested – such as coffee, wheat and lumber – or reared, such as hogs and cattle

You may also see commodities divided into more specific categories to account for their different purposes or the processes that are involved in their production. These categories include:

• Energies: traditional energy sources such as crude oil, gasoline and heating oil
• Metals: mined commodities including gold, copper, silver and palladium
• Agricultural: commodities grown for human consumption – such as sugar and coffee – or clothing and building materials
• Livestock and meat: animals reared for food consumption as well as products like leather and gelatine. They differ from agricultural goods as they aren’t harvested

Commodity stocks

You can get indirect exposure to the commodity market by buying and selling the shares of companies that are involved in the mining, extraction, growth or harvesting of any type of commodity.

The relationship between a commodity and a stock is variable, so it’s important to do your research. Some commodity prices move in opposition to stocks, which makes them a popular way for investors and traders to hedge their portfolios. For example, if there is a problem with the oil supply chain, oil companies will likely suffer in the short term, but the price of oil would rise as demand outstripped supply.

Other commodity prices move in parallel with their corresponding stocks. For example, if the price of gold was going up, then generally so would the price of a mining company.

Commodity ETFs

Exchange traded funds (ETFs) are investment instruments that hold an asset type or basket of assets, such as commodities or stocks. Some ETFs will hold the physical assets they’re invested in – eg a gold ETF could hold a certain amount of gold bullion or coins – while others use more complicated investments to synthetically mimic the underlying market.

Buying and selling ETFs can be a great way to gain exposure to a range of commodities or commodity-linked stocks from a single position.

Our range of commodities markets

Select or search for commodities to view real-time prices, charts and more.

Learn what moves a commodity's price

Commodities prices are driven by the forces of supply and demand, which means there are a variety of factors that can impact them.

Competition
The introduction of alternative technologies and goods can reduce the demand for older commodities. For example, the rise of renewable energies has significantly reduced investment in oil and gas.

New companies can also have a knock-on effect in the market – especially those with more efficient supply chains and faster production lines, as these will lower costs and be more appealing for shareholders.

Politics
Political events and policies can cause changes in prices if they have an impact on exports and imports. For example, increases in import duty can drive up prices.

Macroeconomics
A weak economy often lowers the demand for commodities – especially those involved in building and transport. Whereas a booming economy can result in increased demand which could lead to higher prices.

Seasonality
Agricultural commodities are particularly dependent on seasonal cycles that impact production and harvesting. Prices tend to rise when harvest forecasts are positive, and decline after the harvest, when the market is flooded with products.

Weather
Extreme weather changes and natural disasters can impact natural material production and transportation. For example, colder temperatures can freeze the ground or compromise the goods. Anything that impacts the supply chain, decreasing output, can cause market prices to rise.

Decide how you want to trade commodities

Choose which asset you’re interested in, and take a look through the different routes to trading commodities below.

Trading vs investing in commodities

Create your commodity trading account

Fill out our online form to open a CFD trading account – there’s no obligation to add funds until you want to place a trade.

Alternatively, you could practise trading first in our risk-free demo account.

Discover how commodities trading works

Commodities trading works in the same way as speculating on any other market, in that buyers and sellers come together to exchange goods. The only difference is that commodities can be bought and sold at a current and future price.

As we’ve seen, there are a variety of ways that you can get exposure to the price of commodities. The steps you’ll need to take to buy and sell commodities will depend on whether you’re trading futures, spot prices or options, or stocks and ETFs.

Find a commodity opportunity

The best way to identify an opportunity is to keep an eye on breaking news and your target price levels using technical and fundamental analysis. Once you’ve opened an account with us, you can start making the most of the exclusive tools you’ve got at your disposal, including:

Open your first position

Now that you know how commodity trading works, and have found your opportunity, it’s time to open your first position.

You’ll need to choose whether to buy or sell the market – depending on whether you think the asset will rise or fall in price – and decide on your position size, which will determine the margin you pay.

This is also a good time to think about how you’ll mitigate risk. We offer a range of solutions for risk management, including stop-losses and limit-close orders – these are used to close trades at predetermined levels of loss and profit respectively.

Once you’ve opened your position, you can monitor your profit and loss in the ‘positions’ section of our platform.

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