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How can I trade commodities?

  • Post category:Commodities
  • Reading time:10 mins read

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Speculative traders and investors in particular are increasingly favoring commodities trading. However, newcomers often do not yet know how and where commodities can be bought and sold at all.

In our article we explain how commodity trading works on the world markets. We will also explain how you can speculate on rising or falling prices for commodities. You will also learn which commodities can be traded on the financial markets and how to find a good CFD broker for commodity trading.

How does commodity trading work on the world markets?

For years, not only banks and larger companies, but also every private investor and trader, can enter into commodity trading. On the financial markets, there are several ways in which you can speculate on the prices of commodities, such as gold or crude oil.

Essentially, the following financial products for commodity trading are available for selection on the markets:

  • Commodity futures exchange
  • Commodity funds
  • ETFs and ETCs
  • Options and warrants
  • CFDs
  • Certificates
  • Commodity stocks

We would like to discuss these individual trading options with the different financial products in more detail in the following sections. This way, you may already be able to decide which form of commodity trading is the best option for you.

Commodity futures exchange: trading commodities forward using futures

The most direct way of trading commodities is to conclude corresponding contracts on a commodity futures exchange. One of the best-known futures exchanges for commodities is the Chicago Mercantile Exchange in the United States. There you have the opportunity to trade almost all types of commodities for future dates. However, direct trading is extremely risky and therefore almost exclusively recommended to experienced traders.

In forward trading, you have not only the right to demand the delivery of the commodity, but also the obligation to accept the commodity. Therefore, if you do not open a counter-position in time, it may happen that, for example, 100 kg of wheat will be delivered to your home. Of course, this is not usual, because usually only futures contracts are traded without actual delivery.

Commodity funds with diversification

A much more indirect way to trade commodities is to invest in so-called commodity funds. These are primarily equity funds that focus on specific stocks. In this case, the respective stock corporation is usually active in the commodities sector. Thus, for example, it is a petroleum company or a gold mine.

The advantage of such commodity funds is that you achieve a broad risk diversification. The fund usually invests its capital in at least 20 different stocks, so that there is good diversification. In addition, with actively managed commodity funds you do not have to worry about anything, but entrust your capital to an experienced fund manager.

ETS and ETCs: Index-based investing in commodities

ETFs are a very similar form of commodity investment to commodity funds. These are so-called exchange-traded funds, i.e. index funds that are traded on the stock exchange. In this case, the ETF tracks a specific commodity index, such as a crude oil index or an agricultural commodity index. Here, too, you achieve good risk diversification, as investments are made in a wide range of commodities.

A financial product related to ETFs are ETCs, the so-called Exchange Traded Commodities. These are also index-based financial products that specialize in commodities. An advantage is also the risk diversification and that you mostly participate in the development of the respective index in a ratio of 1:1.

Options and warrants: more suitable for experienced traders

In addition to CFDs and futures, options and warrants also fall into the area of derivatives. The corresponding securities can have different underlyings, including individual commodities. However, trading with options and warrants is somewhat more complicated than CFD trading, since, for example, certain key figures such as the delta or gamma, the time value and other internal information should be observed. Therefore, commodity trading via options and warrants is more suitable for experienced traders.


CFD Trading: Trade Contracts for Difference with Leverage

CFDs represent another possibility to trade commodities. The advantage of contracts for difference is that these products are on the one hand very easy to understand, since they relate directly with their performance to the respective commodity. On the other hand, you have the advantage that you have to use less equity due to the leverage. Although there are chances of above-average profits, there is also a risk of larger losses up to total loss with CFD trading.


Certificates: Investing in commodities with different structures

A relatively established form of trading in commodities are certificates. These are - similar to CFDs - linked to a specific commodity. However, you have to take a closer look at certificates. There are very different variants on the market, some of which differ significantly from each other in terms of conditions, possible returns and risk. The most common types of certificates, some of which are also related to commodities, are:

  • Guarantee certificates
  • Leverage certificates
  • Knock-out certificates

In all cases, the certificate refers to a specific commodity, for example, the precious metal gold. It is the certificates and bonds, so in the case is added the issuer risk of the respective issuer of the securities.

Commodity stocks: Commitment to the stock market

Commodity shares are another option for indirect commodity trading. These are securities issued by companies that are based in the commodities sector. Typical examples include:

  • Mineral oil companies
  • Gold and copper mine operator
  • Large commodity traders
  • Agribusiness

Commodity stocks are certainly the most indirect form of commodity trading. The share price is influenced by numerous other factors far removed from the development of commodity prices.


Which commodities are traded on the financial markets?

In principle, you can trade almost any commodity that is available on the world markets on the financial markets. This starts with precious metals, goes through energy commodities to all agricultural products, such as wheat or corn. In addition, even more exotic commodities are now available for traders to trade on the world markets, such as Argentine beef or rare earths (metals).

Which commodities can I trade in detail?

Since there are about 100 different commodities that you can basically trade on the corresponding financial markets, it is useful to get an overview of the different types of commodities. First and foremost, the tradable commodities are divided into the following categories:

  • Energy commodities
  • Industrial and precious metals
  • Agricultural commodities

The area of so-called energy raw materials includes in particular crude oil, natural gas and coal. These are the most common energy suppliers that are used worldwide. The most frequently traded commodity in this category is certainly crude oil, specifically the U.S. WTI. However, the North Sea variety BRENT, which is of great importance in Europe, is also traded relatively frequently.

Gold and silver from the precious metals category are also among the most popular commodities. These can be traded once via the previously listed financial products, but alternatively also in physical form. You can do this simply by buying coins or bars, for example made of gold, silver or platinum. Zinc, aluminum and copper also fall into the category of precious and industrial metals.

Another very large category in the area of commodities is agricultural commodities. These are also referred to in the field as soft commodities. The focus is on the following agricultural commodities in particular, which are by far the most frequently traded on the markets:

  • Wheat
  • Cotton
  • Corn
  • Sugar
  • Coffee
  • Wood

CFD trading: the fast way to trade commodities

More and more traders and investors want to trade in commodities for the first time and are therefore not yet familiar with the market. While, for example, trading on the futures markets or via options and warrants is relatively complicated, CFD trading in particular is also suitable for beginners.

Trading commodities using CFDs is the easiest way to speculate on rising and falling prices of individual commodities. The reason why CFD trading is so easy and transparent is that the corresponding contract is related to your desired commodity in a 1:1 ratio. The most commonly traded commodity CFDs include:

  • Crude Oil CFDs
  • Gold CFDs
  • Silver CFDs
  • Wheat CFDs

In addition to the simple design of the financial products, with CFD trading you benefit from the fact that the broker effectively lends you money through the leverage. For example, if you want to trade gold CFDs with a value of 10,000 euros, you only have to invest 1,000 euros of your own money with a leverage of 10:1. The rest is effectively lent to you by the broker. Due to the leverage, it is possible to achieve above-average profits even with low capital investments.

However, you must not disregard the equally high risk. In CFD trading, you have to make a margin payment to the broker. If this is no longer sufficient due to a larger price drop of your CFDs, the broker may have to close your position. This would mean that you have completely lost the capital invested in CFD trading for this position.

Which is the best CFD broker for commodities?

In order to trade commodities using CFDs, you first need a trading account with a so-called CFD broker. These are online brokers that specialize in trading contracts for difference and often also in foreign exchange. In Germany alone, more than 30 CFD brokers currently offer their services, so that a comparison of the providers is recommended. In this way, you can find a good broker that can distinguish itself, for example, through the following features:

  • Free demo account usable
  • Favorable trading conditions (narrow spreads)
  • Wide range of underlyings, especially in the commodities category
  • German speaking customer service
  • High safety standards
  • Intuitive trading platform with interesting features
  • Free learning and training area
  • Good selection of deposit options

These previously mentioned features of the offer indicate that it is a good broker. Furthermore, so-called reviews can be helpful. These are test and experience reports on the various CFD brokers, which take their offer once again in detail under the magnifying glass.