Commodity trading for beginners

Q: How can I trade Commodities?

In general, commodities futures contracts are traded on major derivatives exchanges. These contracts enable the buyer to – in theory – take delivery of that commodity from one of the exchange’s warehouses. Luckily, using spread betting or Contracts for Difference, you won’t need to worry about where to store a tonne of Cocoa beans! Your broker or market maker will quote a price which will move in close relation to the price of the underlying contract. Hence, you might see ‘Brent Crude March 2024’ quoted on your trading screen. This will typically be the next futures contract to expire. Sometimes you will see more than one contract quoted. The number of contracts available will differ from commodity to commodity, as some are priced for regular delivery, like oil, while others are subject to annual or semi-annual harvests.

Commodities are the raw materials from which products are made. Examples include precious and industrial metals such as gold and copper, agricultural products such as wheat, fuel products such as crude oil and soft commodities such as coffee.

In our commodity trading for beginner guides we look at what affects the price of each Commodity and how it can be traded.

Metals

Hydrocarbons and Softs

How can I trade Commodities?

In each of our commodity trading for beginner guides we look at how that commodity can be traded, as there are some important differences.

Trading commodities can be done through various instruments, with futures contracts traded on major exchanges like CME Group being a popular choice. To start trading commodity futures, you’ll need to open an account with a registered broker that offers access to the desired exchange. Once your account is set up and funded, you can begin placing trades based on your market analysis and trading strategy. It’s essential to understand the specific characteristics of the commodity you wish to trade, such as its seasonality, supply and demand dynamics and geopolitical factors that may impact prices.

You can also gain exposure to commodities through other instruments, such as options on futures, exchange-traded funds (ETFs) or Contracts for Difference. If you choose that route, your broker or market maker will quote a price which will move in close relation to the price of the underlying contract.

Sometimes you will see more than one contract quoted. The number of contracts available will differ from commodity to commodity, as some are priced for regular delivery, like oil, while others are subject to annual or semi-annual harvests.

However, each approach comes with its own set of risks and requirements. As with any form of trading, it’s crucial to educate yourself, develop a sound trading plan, and manage your risk carefully. See more educational resources on trading commodities here.

How do Commodity ETFs work?

The introduction of commodity-based Exchange Traded Funds (ETFs) has made it possible to trade commodities like you would company shares. ETFs will seek to track the performance of a particular commodity, either by holding the physical asset (some ETFs hold gold on deposit in vaults, for example) or by purchasing commodity futures.

Be aware that you are exposed to the price of the ETF, not the cash commodity price, and the two can diverge over time as the costs of managing the ETF impact its performance.

What is a Commodity spot price?

The commodities spot price is becoming more frequently used by some brokers. This is the price today, for delivery in the very near future. It represents the more immediate price of a commodity, and is also referred to as the ‘cash’ price. If you just want to trade a commodity on a day to day basis, without having to worry about the differences in price between futures contracts, the cash price may be a better option.