What are commodities and how do you trade them?
Find out everything you need to know about commodity trading and how it works – including what commodities are, what moves commodity prices, and the difference between spot and futures prices.
Are you ready to trade commodities? Take your position in just three steps:
Choose a commodities market to trade
Focus on commodities like gold and oil, or commodity-linked stocks and ETFs.
Decide whether to trade or invest
Speculate on market prices over the short term, or invest for a longer-term outlook.
For a more detailed approach, take a look at our complete guide below.
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
2. Soft commodities
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
- Aricultural: 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
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.
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.
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.
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.
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.
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.
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 or invest in 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
You might want to trade commodities if:
- You’re interested in speculating on the underlying price of commodities
- You want to trade without owning the underlying asset
- You want to trade rising and falling markets – going long and short
- You want to leverage your exposure
- You understand that leverage increases your risk and that you can lose far more than your initial deposit
- You want to take shorter-term positions
- You want to hedge your portfolio
- You want to open tax-efficient positions1
You might want to invest in commodities if:
- You’re interested in buying and selling commodity-linked stocks and ETFs
- You’re happy to pay the full value of an asset upfront
- You want to limit the potential for loss to your initial outlay
- You’re focused on longer-term growth
- You want to build a diversified portfolio
- You want to take ownership of the underlying asset
- You want to gain voting rights and dividends
Create your commodity trading account
Fill out our online form to open a spread betting, CFD trading or share dealing 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 spot prices, futures, or options, or investing in stocks and ETFs.
- Trading commodity futures
- Trading commodity spot prices
- Trading commodity options
- Trading or investing in stocks and ETFs
Trading commodity futures
Futures are contracts to exchange an asset for a set price on a set date in the future.
When you trade futures with us, what you’ll actually be getting is a spread bet or CFD on the underlying futures price. You won’t have to enter into a futures contract, so at expiry we’ll roll over your futures contract into the next month, unless you manually close your position.
Please note that there may be a difference in the price for the next month’s contract. After you’ve opened your account and logged in, simply:
- Search for the commodity you’d like to trade – eg ‘coffee’
- Choose ‘futures’ in the right-hand panel
- Select the expiry you’re interested in
- Pick your trade size and open your first position Learn more about futures and how to trade them See a commodity futures example
Trading commodity spot prices
While futures prices reflect how much the markets believe a commodity will be worth when the future expires, spot prices show how much it is worth right now – or ‘on the spot’.
Our proprietary ‘spot’ prices are based on the two nearest futures on the market in question. They reflect the underlying market but with no fixed expiries, making them suitable for both beginners and experienced traders.
Once you’ve created your account and logged in, you can trade the spot market by:
- Searching for the commodity market you’d like to trade – eg ‘gold’
- Selecting ‘spot’ in the right-hand panel
- Choosing your trade size and opening your first position See a commodity spot price example
Trading commodity options
Options give you the right but not the obligation to exchange an asset at a specific price on a specific date. In this case, you’d be trading the price of underlying commodity futures on US crude, gold and silver.
Once you’ve created your account and logged in, you’d just need to:
- Select ‘options’ from the menu on the left
- Tick ‘commodities’, choose your asset – for example, ‘Spot Gold’ – and whether you want a daily, weekly or monthly option
- Pick the option type, strike price and trade size you want
- Open your first position Learn more about how to trade options See a commodity options example
Trading or investing in stocks and ETFs
When you trade stocks and ETFs with spread bets and CFDs, you’ll be able to choose whether you go long or short on the market price. But when you invest, you can only opt to buy – as you’re taking a position on a long-term increase in price. To take a position, you’ll need to:
- Create an account and log in
- Search for your chosen stock or ETF
- Choose your position size and select buy – or sell if you’re using spread bets and CFDs
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:
Get technical and fundamental analysis from our experts
Discover price trends using our in-platform tools such as MACD and Bollinger bands
Know as soon as your target price is met with our automated trading alerts
Receive actionable ‘buy’ and ‘sell’ suggestions based on analysis
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.
Ready to create an account?
There are over 35 commodity markets that you can trade, including crude oil, coffee, natural gas, gold, wheat, cotton and copper
You can also speculate on or invest in a range of commodity-linked stocks and ETFs.
First, choose from 35 commodity markets, or commodity-linked stocks and ETFs. Next, decide whether to speculate on market prices over the short term, or invest for a longer-term outlook. And finally, you’d need to open a live account with a provider who offers commodity trading or share dealing.
What are the most traded commodities in the world?
The most traded commodities, by trading volume, are gold, silver, US crude oil, Brent crude, copper, natural gas and agricultural products – such as coffee, wheat and sugar.3
1 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
2 Place 3+ trades on UK shares in the previous month to qualify for a £3 commission rate. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
3 DailyFX, 2020