A complete guide to commodities trading

In financial markets, commodities trading involves the buying and selling of physical goods such as agricultural products, energy resources, and precious metals, with the aim of profiting from the price fluctuations of these assets. Read on to find out what can be traded in a commodities market, the most popular commodities to trade, and how to trade in commodities on Capital.com.

What is commodities trading?

Commodities trading involves the buying and selling of physical goods, or ‘commodities’, in the financial markets through the use of financial derivatives such as CFDs. These commodities can encompass a wide range of assets, from agricultural products and energy resources to precious metals and soft commodities.

Commodities trading is underpinned by the fundamental economic principle of supply and demand. When you trade in commodities, you’re hoping to capitalise on the price fluctuations of such assets. These fluctuations can be driven by anything from weather conditions to geopolitical events and global economic trends. Commodities traders use these markets to manage risk, speculate on price movements, and ensure a stable supply of crucial resources for the global economy.

 

What can be traded in a commodities market?

When you trade in commodities you have a wide variety of assets at your disposal – from raw materials and agricultural products to energy resources and metals. Generally, commodities can be divided into four main categories:

  • Agricultural commodities: these include food crops, such as cocoa, cotton, corn and coffee, livestock, like pigs and cattle, and industrial crops, such as palm oil and lumber.
  • Energy commodities: these include natural gas, crude oil and gasoline, coal and uranium, ethanol and electricity.
  • Metal commodities: cover base metals (copper, iron ore, zinc, aluminium, nickel, steel, etc.) and precious metals (gold, silver, palladium and platinum).
  • Environmental commodities: these include renewable energy certificates, carbon emissions and white certificates.

Why is gold one of the most popular commodities to trade?

Gold is one of the most commonly traded commodities. The precious metal’s historical reputation as being a hedge against inflation means many investors and traders gain exposure to gold during times of rising prices and currency devaluation. Its tendency to retain value even in tumultuous economic climates has long made it a popular choice for portfolio diversification, frequently offering a counterbalance to more traditionally ‘risk-on’ assets such as shares. With its reputation as a store of value, gold is generally considered a ‘safe-haven’ asset for both seasoned and novice traders alike.

Why do traders trade in commodities?

Traders choose to trade in commodities for various reasons, ranging from profit-seeking to hedging against inflation. Here are some of the most common reasons.

Profit potential

Commodity traders may choose to go long or short with the aim of profiting from price fluctuations in either direction. These fluctuations can be driven by a range of factors, from supply and demand imbalances to wider geopolitical events and evolving economic trends. Volatility means an increased risk of losses as well as a chance to profit.

Diversification

Commodities trading can help diversify a trader’s portfolio. The price action of these assets may exhibit low correlation with financial markets such as stocks and bonds, the latter of which may often move in tandem with broader economic trends rather than be influenced by unique supply and demand drivers of commodities. This can potentially mean commodities provide a risk-reducing element that can enhance overall portfolio stability, although outcomes are never guaranteed.

Inflation hedge

Commodities, especially precious metals such as gold and silver, have historically been known to serve as a hedge against inflation, retaining intrinsic value where other assets may dip.

Global economic insights

Commodities markets can provide valuable insights into the health of the global economy. Price movements in raw materials and energy resources often reflect shifts in supply and demand, making them an insightful economic barometer.

Trade commodities with leverage

You can trade commodities through financial derivatives such as CFDs, which give you leveraged exposure to the fluctuating price of the asset. It’s these underlying price fluctuations that commodities traders attempt to profit on when taking a position. When you trade in commodities using leverage, you can control large positions with a relatively small amount of capital, or ‘margin’. However, it’s important to remember that trading with leverage can also amplify losses, so you should use it with caution and have a solid risk-management plan in place.

Costs involved when you trade commodities

As with all of our markets, when you trade commodities with us, you’ll pay a spread, which is based on the difference between the buy price and the sell price of the market. For example, if you’re trading gold, our spread is 0.30 or 0.3 points.

You may also pay additional fees, for example if you use a guaranteed stop-loss* or if you hold a position overnight. As with all Capital.com instruments, you won’t pay any commission when you trade commodities on our platform.

You should always ensure you’re aware of the cost of trading before you open a position. You can do this via our charges and fees page.

*Stop-losses are not guaranteed, but we offer guaranteed stop-losses (GSLs) for a fee. You can check the GSL fee value in a deal ticket when opening a position and adding a GSL.

Learn how to trade commodities with Capital.com

You can trade commodities with Capital.com by following these steps:

  • 1. Choose a commodity CFD to trade, based on your trading goals
  • 2. Decide on your trade size 
  • 3. Consider applying a stop-loss to manage risk
  • 4. Open your position long or short
  • 5. Manage your position, monitoring fundamental and/or technical drivers
  • 6. Close your position

Commodities trading examples

Why trade in commodities with Capital.com?

We’re proud to have won a roster of awards from leading authorities in the trading world. We’re rated Excellent on Trustpilot, and we’re always working to improve the experience of more than 630,000 clients. Here are just a handful of reasons to choose us to trade commodities with us.

  • Clear, easily-navigable interface across desktop, app and tablet 
  • Rapid withdrawals*
  • Multiple chart types and 75+ technical analysis tools 
  • Insightful education via courses, videos and webinars, as well as an in-platform, asset-specific Reuters feed
  • Round-the-clock support

*98% of withdrawals are processed within 24 hours, according to our internal server data from 2022.

Frequently asked questions

What are the largest commodity exchanges?

The largest commodity exchanges include the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX) in the US, the London Metal Exchange in the UK, the Tokyo Commodity Exchange in Japan and the Shanghai Futures Exchange in China.

How do you trade commodities?

There are several ways you can trade in commodities, including with CFDs, commodities futures, commodity options, commodities stocks, exchange traded funds (ETFs), commodity pools and managed futures. On Capital.com, we offer CFDs on commodities, commodity stocks, and commodity ETFs.

When is the best time to trade commodities?

There is no best time to trade commodities, although there are various seasonal and exchange-related considerations to make depending on the asset you’re trading. For example, West Texas Intermediate (WTI) crude oil contracts, the benchmark for the US oil market, tend to be most liquid during 9:00am to 2:30pm EST. Prices for agricultural products tend to move on the release of World Agricultural Supply and Demand Estimates (WASDE) reports which contain data on supply and demand expectations. The gold market tends to be most active at the London open at 8:00am GMT, and the US market open at 1:30pm GMT as traders tend to place orders at the opening bell.

Is commodity trading profitable?

Commodity trading can be profitable for traders – but this all depends on factors like market conditions, trading strategies, and risk management. To maximise your chances of success in commodity markets, you should be aware of all the supply and demand factors that affect specific assets, which will differ depending on the market you’re trading. As with all types of trading, there will be opportunities to profit as well as significant risks.


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