Welcome to Trading Brokers step by step guide to trading commodities online. Here you will find an easy to understand explanation of commodities trading. This includes how to trade commodities online, what you need to trade commodities and how to open a trading account with a broker so that you can start trading commodities online today.
Maybe you are curious about how to trade commodities because you have an interest in a particular commodity and would like to invest in order to diversify your trading portfolio. Perhaps you are new to online trading and considering the different financial instruments from different asset classes.
Whatever your back ground or experience level, this trading commodities guide can help if you are looking to start trading commodities online. We will provide you with a clear definition of commodities, their four main categories, what drives the commodities market, how commodity trading works, the different ways you are able to invest in commodities and more.
Commodities are extremely important as they are essential factors in the production of other goods. Most of us will use a range of commodities each day, perhaps without even realising it. From the milk in your morning coffee, your glass of orange juice, the oil and gas that fuel your car and home, to the cocoa in your chocolate. These are all amongst the commodities that can be invested and traded on the commodities market.
Commodities are traded constantly on commodity exchanges around the world such as the Chicago Mercantile Exchange, The London Metals Exchange, and the Intercontinental Exchange.
Commodities are raw physical assets that are used in commerce such as precious metals (gold and silver), crude oil, natural gas, coffee, wheat or sugar. The individual commodities can be combined to produce other goods or services. An example of this is when the commodities sugar and cocoa are used to create chocolate bars. Then you have commodities that are used for their own purpose such as natural gas to heat your home.
One of the key differences between commodities and other goods is that they are interchangeable and standardised. This means that the value of each commodity is set by the commodity exchange. Thus, it does not matter where the commodity is produced or who produces it, they will have a similar quality and price globally.
Commodities trading is one of the oldest markets that dates all the way back to ancient civilisation. It is believed to have originated in Sumer (now southern Iraq) between 4500 BC and 4000 BC. Traditionally, people would exchange tokens or tickets in exchange for animals, rice or other commodities. Trading commodities has a much longer history than that of stock trading and forex trading.
The global commodities market really started to accelerate when the Chicago Board of Trade was setup in 1848. They would act as a counter-party to both the buyer and seller in the transaction, which eliminated the risk of default.
For around the next hundred years, agricultural products were the primary commodities traded on futures exchanges. Then, in the mid-1900s, cotton, lard, livestock and precious metals were gradually introduced to the exchanges.
It wasn’t until the 1970s that new financial products began to be developed – products that allowed people to speculate on the changing prices of commodities, without having to purchase or sell the physical commodity.
The commodities market is now amongst one of the most popular types of markets to trade on, from commercials, institutions and speculators alike. Historically, commodities were traded physically, whereas today, most commodity trading takes place online.
Commodities trading is the buying and selling of raw physical assets such as precious metals (gold and silver), crude oil, natural gas, wheat, cocoa or sugar. Traders will buy (go long) if they think prices will rise, or sell (go short) if they think prices will go down. The difference between the prices when a commodities trade is opened and closed is the realised profit or loss.
There are a number of ways you can trade commodities: investing in the physical commodity itself, trading commodity futures, trading commodity options, trading commodity ETFs, trading commodity shares and trading CFDs on commodities.
If you want to trade commodities online, you will need a trading broker to buy and sell commodities via a trading platform which will connect you to the commodities market. You can see a selection of our best trading brokers below with whom you can open a trading account to trade commodities online.
ASIC, BVI, CBI, FFAJ, JFSA, FSCA, IIROC, ADGM FRSA
Min $100 Deposit
FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF
Min $250 Deposit
ASIC, CySEC, IFSC, DFSA
Min $5 Deposit
ASIC, CySEC, FSA, SCB
Min $200 Deposit
ASIC, FCA, DFSA, SCB, CySEC, BaFin, CMA
Min $200 Deposit
In simple terms, commodities are usually either extracted, grown or produced. The commodities market can be categorised into four main categories which are as follows:
In the commodities market, you will often see these referred to as hard commodities and soft commodities. Hard commodities are those that are primarily mined (gold, oil, etc.) whilst soft commodities are agricultural or animals (wheat, soybeans, pork, sugar, etc.).
As we would expect, some commodities are more popular and traded more frequently than others. For example, the feeder cattle market may only be of interest to the farmer and company distributing the stock. However, a market like oil will usually involve drilling companies, large service companies like BP and Shell, airlines who are actively involved in buying and selling oil to keep their fuel costs in check and market speculators.
To put this into perspective, according to TradingView, the total trading volume of Feeder Cattle for September 2019 was 36,000 contracts whereas the total trading volume of Crude Oil for September 2019 was nearly 14 million contracts.
We will now take a look at some of the most commonly traded commodities.
Coffee: Coffee is one of the most popular beverages around the globe with billions of cups consumed every single day. It is also a popular choice in the commodity market, making it one the most traded commodities after crude oil.
Sugar: White sugar and raw sugar can be traded as commodities. Most people see sugar as an additional sweetener although it should be noted that it is also a key player in the production of ethanol. Ethanol is an important industrial chemical; it is used as a solvent, in the synthesis of other organic chemicals, and as an additive to automotive gasoline (forming a mixture known as a gasohol). Ethanol is also the intoxicating ingredient of many alcoholic beverages such as beer, wine, and distilled spirits.
Crude Oil: Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. Crude oil is a type of fossil fuel that can be refined to produce usable products such as gasoline, diesel, and various other forms of petrochemicals. Demand for this commodity is also high, because crude oil is used for transportation fuel, the production of plastics, synthetic textiles, fertilisers, computers, cosmetics and more. The major oil benchmarks are WTI and Brent Crude Oil. It can be a popular commodity for trading because of its volatility and it is a market that is very reactive to political events, with the top producers of crude oil including Saudi Arabia, the US, Russia and China. Please see our oil trading guide for more information.
Natural Gas: Natural gas (also called fossil gas; sometimes just gas), is a naturally occurring hydrocarbon gas mixture consisting primarily of methane, but commonly including varying amounts of other higher alkanes, and sometimes a small percentage of carbon dioxide, nitrogen, hydrogen sulfide, or helium. This commodity has a range of industrial, residential and commercial uses, including generating electricity. Some of the top natural gas producers are Gazprom, Royal Dutch Shell, ExxonMobil, PetroChina and BP.
Gold: Gold is perhaps the most popular commodity when it comes to metals. Known as a precious metal and often seen as a safe haven asset, gold is typically a commodity that some investors look to when other markets are in turmoil. It is not uncommon to historically see gold inversely correlated with the US dollar. Gold has a higher value than silver and is often seen as a long-term investment. Please see our gold trading guide for more information.
Silver: Although gold is widely regarded as the most popular metal commodity for trading, there are some advantages to trading silver. This includes it’s fast moving price which can be an attractive proposition for the active commodity traders. Please see our silver trading guide for more information.
Copper: Copper is always in demand as it is used for a variety of products and services such as electrical equipment, engineering, plumbing and cooking utensils. Some say that the price of copper is considered to be a barometer of the global economy as a whole, thus investing in copper can be a way to take a bullish stance on world gross domestic product (GDP).
There are a range of different factors that affect the price of a commodity, with each commodity having its own unique characteristics. Price fluctuations can occur depending on the availability of a commodity along with supply and demand, currency strength and even the weather.
The fundamental rule is that commodity prices will rise with increasing demand. Prices will also rise when there is a fall in the overall supply or inventory of a commodity. On the other hand, the price of a commodity will fall when faced with decreasing demand and increasing supply.
The supply of a commodity is the amount of the commodity which the sellers or producers are able and willing to offer for sale at a particular price, during a certain period of time. The availability of a commodity can be determined by a variety of factors, including government intervention, transport, cost to produce, weather, war, and more.
As an example, in 2019, the world’s largest oil processing plants in Saudi Arabia were attacked which reduced the global oil production by 5 million barrels per day. This caused a record surge in the price of oil due to there being less oil available but the demand remaining the same. Therefore, commercials and institutions tried to get their hands-on whatever oil they could. This is a rare type of ‘scarcity’ that can typically lead to an increase in commodity prices.
The demand for a commodity is its quantity which consumers are able and willing to buy at various prices during a given period of time. The demand of a commodity can be influenced by a range of factors, including a change in consumer habits and the health of the economy.
This is evident in the price of sugar decreasing over the years as people have become more health conscious and sugar consumption levels have changed. This caused less demand for the commodity which had an impact on its price.
The behaviour of the US dollar is another key factor that can influence the price of commodities along with supply and demand.
On international markets, commodities are priced in US dollars (USD) whilst it is also the world reserve currency. This entails that commodity prices can be linked to the value of the USD against other foreign currencies. As an example, if the value of the dollar was much lower than other currencies, it would cost more dollars to purchase the commodities than it would if the dollar is valued at a higher rate.
When there are times of economic turmoil and the value of USD decreases, some investors may turn to gold as a safe haven asset. Therefore, gold can benefit from being priced higher in USD and also from the further investment which can create larger price fluctuations than some other commodities.
Commodity substitution is where market participants will try to find cheaper alternative commodity elsewhere. This can happen if a particular commodity becomes too expensive and there are cheaper options which can act as a suitable replacement. In this instance, the demand for the original commodity may reduce which can results in the occurrence of a price decrease.
Copper is a prime example of commodity substitution. Copper is used in a variety of different industrial applications. Some manufacturers began using aluminium to replace copper as it increased in price.
Another factor that can have an influence on the price of commodities is the weather. Agricultural commodities such as coffee, cocoa and wheat, require consistent weather cycles in order to be grown and harvested. Unexpected weather conditions such as torrential rain or drought can have a great impact on these commodities.
The weather can also have an influence on energy commodity prices. If there is an extremely could winter, there is likely to be an increased demand for heating which increases the demand for heating oil and natural gas. If there is a very hot summer, there is likely to be an increased demand for air conditioning which would increase the demand for commodities involved in electricity production, such as natural gas and coal.
For investors, commodities can be an important way to diversify their portfolio beyond traditional securities. Because the prices of commodities tend to move in opposition to stocks, some investors also rely on commodities during periods of market volatility. Three of the primary reasons for trading commodities are the growing global population, inflation hedging and portfolio diversification.
The global population has increased at a rapid rate since the beginning of the twentieth century. The more people in the world, the greater the demand for commodities. This means that commodity prices are likely to continue to increase over the long term.
As the population continues to grow, so does the demand for infrastructure, which could have a significant impact on the demand for both metal and energy commodities. In addition, a larger population means that there are more mouths to feed, which can affect the demand for agricultural commodities.
Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. In terms of commodities, this means that it will cost more US dollars to purchase the same amount of a given commodity in the future.
Some traders would consider investing in commodities directly in order to try and protect themselves against these prices increases which they could benefit from by selling the commodities at a higher price at a later date.
The majority of investors tend to stick to a particular asset class. This is understandable to an extent as it can take significant time and knowledge to understand each market. However, if the market they are invested in starts to take a bad turn, the whole portfolio is hit. Had they diversified their investment portfolio across multiple assets, the overall portfolio may not have been as adversely affected.
There are various ways to trade commodities: investing in the physical commodity itself, trading commodity futures, trading commodity options, trading commodity ETFs, trading commodity shares and trading CFDs on commodities. We will outline each of these options below.
Investing in physical commodities is when you go directly to the source and purchase the goods themselves. If you then own the physical commodities for a period of time and the prices rise, you could benefit from the difference.
However, it is not very feasible for the average retail trader to physically purchase and sell large quantities of commodities. You will also need to consider transporting and securely storing the products along with finding a suitable buyer.
Commodities futures contracts are agreements to buy or sell a raw material at a specific date in the future at a particular price. The contract is for a set amount. In simple terms, if the commodity price rises between the purchase date of the contract and the expiration date of the contract, the trader can sell the futures contract at a profit. If the price falls, the trader will make a loss.
Commodity futures can be used to hedge or protect an investment position or to bet on the directional move of the underlying asset.
One of the benefits of trading commodity futures is the use of leverage, which allows traders to take a larger trade position than they would have been able to with their available funds.
For example, if a futures contract is offered with leverage of 1:5, this means that for each dollar the trader wants to invest, they can access $5 worth of the commodity in question. It should be noted that whilst leverage can increase potential profits, it can also significantly increase potential losses.
In a similar manner to commodity futures, commodity options are a type of financial derivative that allowed traders to speculate on the value of a commodity without having to purchase the commodity outright. Options can also be traded with leverage.
There are two types of commodity options, a call option and a put option. The owner of a call option has the right but not the obligation to buy a commodity futures contract at a set price (the strike price) on or before a certain date (the expiration date). The owner of a put option, on the other hand, has the right but not the obligation to sell a futures contract at the strike price on or before the expiration date.
There are two sides to every option trade, a buyer and a seller. Each of these sides experiences the opposite outcome; if the option buyer is making money the option seller is losing money in the identical increment, and vice versa. If the price of the future becomes higher than the strike price, a call option can be sold for a profit. For a put option, the reverse is true – the price of the future needs to fall below the strike price.
An ETF, or an exchange-traded fund, is a fund that invests in a group of financial assets. As a trader, you can invest in these funds via a trading broker or on a stock exchange.
ETFs are commonly known for containing a combination of stocks, although some ETFs do invest in physical commodities such as gold bullion, whilst others invest in commodity futures or options.
A commodity ETF is an exchange-traded fund (ETF) invested in physical commodities, such as agricultural goods, natural resources, and precious metals. A commodity ETF is usually focused on either a single commodity—holding it in physical storage—or investments in futures contracts.
This means that the risks involved with trading commodity ETFs can mirror the risks of the assets contained within the ETFs. Thus, ETFs that invest in physical commodities will carry similar risks to investing in physical commodities, whilst those ETFs that invest in futures carry similar risks to buying futures directly.
Traders may choose to invest in commodity ETFs due to the diversity that comes with investing in a range of assets via a fund, rather than picking individual assets to invest in. Although this does mean that the risk is spread amongst the asset within the fund and thus, there is the possibility to miss out on some large movements that may take place on individual commodities.
Commodity shares is a term used to refer to investing in shares of a company that produces the commodities. The idea behind it is that the revenue of the company is determined by the price of the commodity which they are selling. If the price of the commodity was to increase, we could anticipate that the company’s revenues and its share price should also increase.
It must be noted that there are other factors which influence a commodity share price such as market competition, business costs, interest rates, local economy and more.
In finance, a contract for difference (CFD) is a contract between two parties, typically described as “buyer” and “seller”, stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time.
At the end of the contract, the two parties exchange the difference between the price of the commodity at the time they entered into the contract, and the price of the commodity at the end. In simple terms, the trader is paying the difference between the opening and closing price of the commodity they are trading.
CFDs enable you to speculate on rising or falling prices without taking ownership of the underlying asset, and can be used to trade a range of markets including shares, forex, indices and commodities.
As an example, if you had opened a long (buy) CFD trade on gold when the price was $1,530, and you chose to close the trade after the price of gold increased to $1,555, you would have made a profit on the difference in the gold price, or $25. If the price fell to $1,505, then you would have made a loss of $25.
Commodity CFD trading is popular due to the simplicity of opening and closing positions, especially when compared to some other forms of investing. Benefits include leverage, 24-hour markets, competitive fees, no need to hold physical commodities along with the ability to trade long and short.
In order to trade commodity CFDs, you will need to open a trading broker account. You can see a selection of our best brokers below with whom you can open an account to buy and sell commodity CFDs online through the trading platforms that they provide.
If you have taken the time to read through the above, you should hopefully have an understanding of commodities and how to trade commodities online. Here is a summary of the key steps:
Trading commodities online requires investing time and money. It also carries an element of risk, especially when trading commodities with leverage. You will need to research and analyse various commodities, follow market news and manage your commodity trades. It is important to understand the risks and dedication that comes with trading commodities online.
Before trading commodities, it is important to learn as much as possible about the commodity market. This way you can be prepared as any mistake could prove to be costly. There is a vast array of free educational materials provided by many trading brokers that can help you to improve your online trading skills and knowledge.
Most brokerages will also offer a free demo trading account so that you can practice trading commodities online with virtual funds in order to familiarise yourself with trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.
In order to trade commodities online, you will need a trading account and platform to execute your trade positions through to the commodities market. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options, commodities available to trade online and customer support.
If you do not have the time to research brokers, you can see a list of our best brokers that we have already prepared to help traders choose a broker that meets their own individual needs. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.
If you have made it this far then you may be ready to start trading commodities online! The next step is to research the different commodities to discover which markets you have an interest in. Perhaps there is a particular commodity that is already of interest to you and you would like to use your knowledge to trade it. You can choose from hard and soft commodities.
Amongst the most important factors that can help determine commodities trading results can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their commodities trading.
Once you know what commodities you want to trade online, you can analyse them to help decide if and when you will place your trades. After placing a commodities trade, you will need to keep track of how it performs and manage it according to your commodities trading plan. Some traders will keep hold of commodities for the long-term, whereas others may buy and sell commodities on a daily basis. You should always invest and trade in a way that suits your own personal goals.
Commodities trading is a popular choice for active investors who would like to trade a market that is open 24 hours a day. The growing global population, inflation hedging and portfolio diversification or some reasons investors may consider commodities trading. Traders who would usually trade forex, trade stocks, trade indices, trade cryptocurrency, may look to diversify their portfolio.
However, it is important to understand the significant risks involved with trading commodities online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.
This can be a useful way to familiarise yourself with how to trade commodities and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most trading brokers provide unlimited demo accounts free of charge.