Introducing the financial markets

Lesson 10 of 10

Trading commodities

Where are commodities traded?

Commodities are bought and sold on a number of exchanges specialising in a particular type of commodity.

New York Mercantile Exchange (NYMEX)

The world's largest physical commodities futures exchange
Energy and metals: crude oil, natural gas, heating oil, RBOB unleaded gas, gold, silver, copper, platinum, palladium


The London International Financial Futures and Options Exchange is the largest trading floor for commodities in Europe
Soft commodities: cocoa, wheat, coffee, sugar, corn

Chicago Board of Trade (CBOT)

The world's oldest futures and options exchange
Grains: corn, soybeans, soybean oil, soybean meal wheat, oats, rough rice

London Metal Exchange

The world's leading non-ferrous metals market
Metals that do not contain iron: aluminium, copper, tin, nickel, zinc, lead, aluminium alloy, cobalt

ICE Futures US

A leading global soft commodities futures and options exchange
Soft commodities: sugar, cotton, cocoa, coffee, orange juice

Contract size

Commodity futures are traded in contracts. Each commodity market has a standard size, set by the futures exchange where it trades. As commodities are often bought and sold in large amounts, the contract size also tends to be large.

Let's take gold as an example. The contract size for gold futures is 100 troy ounces. So if gold is trading at $1100 per troy ounce and you buy just one contract of it, your contract would be worth $110,000 (1100 x 100 ounces).

Small investors generally don't have access to such large amounts of money, so just like when trading forex, you can often trade commodity futures on leverage. Many exchanges and brokers also offer 'mini' contracts, which tend to be between 10% and 50% of the size of a standard contract.

It's very important to note that both standard and mini contract sizes vary widely depending on the type of commodity - so it's vital to check the contract size carefully before placing a trade.


The contract size for silver is 5000 troy ounces. If you bought 10 silver contracts at $17.05 per troy ounce, and the silver price then rose to $17.15, how much profit would you have made in dollars?



Your profit would be ($17.15 – $17.05) x 10 contracts x 5000 ounces
= 0.1 x 10 x 5000
= $5000
Reveal answer

What drives commodity prices?

As with all trading, the most important factor that affects commodity prices is the balance between supply and demand.

If, for example, there's a good cotton crop which boosts the amount in circulation - the price of cotton will decrease (assuming that demand remains the same). On the other hand, if clothes manufacturers and other companies using cotton need more of the commodity, but producers don't have the capacity to match this demand, the price will increase.

Other factors that drive commodity prices include:

The weather

Agricultural commodities are particularly dependent on the weather as it influences the harvest. A poor harvest will result in low supply, causing prices to rise.

Economic and political factors

Events such as war or political unrest can have a big effect on prices. For example, turbulence in the Middle East often causes the price of oil to fluctuate due to uncertainties on the supply side.

The US dollar

Commodities are normally priced in US dollars, so their prices generally move inversely to it. If the price of the dollar falls, it takes more dollars to buy the same amount of commodities - so the price of commodities rises. Conversely, if the dollar goes up then it's cheaper to buy commodities, all things being equal.

Lesson summary

  • Commodities are bought and sold on special exchanges in contracts
  • Contract sizes vary depending on the type of commodity traded, but tend to be very large
  • However, smaller investors can usually buy and sell commodity futures using leverage
  • Commodity prices are often very volatile and are affected by supply and demand, the weather, geopolitical factors and the value of the US dollar
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