Futures vs commodities: a trader’s guide
Learn about futures and commodities with trading hours, history, and how to trade commodity futures via CFDs on Capital.com.
Futures vs commodities: what’s the difference?
If you’re new to trading, it’s easy to get confused between futures and commodities, but while they're related, they aren't really comparable. Commodities are the assets being traded, like oil, wheat, or gold. However, futures are agreements to trade these assets at a later date, based on their expected price.
You can also trade commodities at the spot price, meaning the current market price, if you want to speculate on their immediate price movements.
What are commodity futures?
Commodity futures are standardised contracts designed for trading commodities like natural gas and copper. They allow traders to agree to buy or sell a set amount of a commodity at a predetermined price on a specified future date, and they’re primarily traded on futures exchanges.
As a type of derivative, futures contracts derive their value from the underlying commodity, allowing traders to hedge against price risks – a strategy commonly used by producers and consumers of the commodity. Additionally, traders use futures for speculation, aiming to profit from future price changes without needing to take physical delivery of the commodity.
Commodity futures can also be traded via CFDs (contracts for difference) through a derivatives broker, allowing traders to speculate on price movements without owning the actual futures contract or underlying commodity, offering greater flexibility and smaller position sizes.
Why trade commodity futures?
Traders might choose commodity futures over other types of trading for several reasons:
- High liquidity – markets for commodities like oil and gold are highly liquid, making it easier for traders to enter and exit positions.
- Leverage opportunities – futures contracts often offer significant leverage, allowing traders to gain greater market exposure* with a relatively small initial investment, although leverage is risky as it amplifies both profits and losses.
- Speculation without ownership – futures contracts derive their value from an underlying asset, enabling traders to speculate on price movements without the need to own, transport or store the physical commodity, which can be expensive due to their size and storage requirements.
- Hedging: Producers, consumers, and traders use futures to hedge against price risks. For example, a farmer might sell corn futures to lock in a price ahead of harvest, reducing the impact of price fluctuations in the physical market.
*Leverage can increase exposure to potential losses as well as gains
What’s the origin of commodity futures?
Commodities are among the earliest traded assets in human history. Precious metals and agricultural goods have been exchanged for millennia, initially in their physical form. Over time, commodities trading has evolved alongside financial markets, introducing more sophisticated methods like futures contracts.
The Dojima Rice Exchange in Japan, founded in 1697, became the first formal futures trading exchange in the world when it was officially authorised and sanctioned by the Tokugawa shogunate in 1730. The Chicago Board of Trade (CBOT) was founded in 1848 as a cash market for grain. It became the first major futures exchange in the United States in the 1850s when it introduced standardised futures contracts for corn, wheat and soybeans.
The first futures contracts were developed for agricultural commodities as a risk management tool. Farmers and buyers used them to hedge against price fluctuations:
- For farmers – by locking in a guaranteed price for their future harvests, farmers protected themselves from potential price drops.
- For buyers – by securing set prices for commodities they needed in the future, shielding themselves from potential price increases.
By enabling advance agreements on prices, futures contracts helped stabilise commodity markets. This reduced the impact of seasonal variations and unpredictable events on prices, benefiting both producers and consumers.
How do commodity futures work?
Commodity futures are standardised legal contracts that a trader makes with a broker to buy or sell a specific amount of a commodity (like oil, gold or wheat) at a predetermined price on a specified future date. These contracts are primarily traded on futures exchanges, such as the Chicago Mercantile Exchange (CME), and are used by hedge traders and speculative traders.
Here’s how commodity futures traditionally work:
- Entering the contract – first, a trader agrees on a price with the broker at which they commit to purchasing or selling the commodity in the future. This is set upon entering the contract and specifies the terms for delivery (or financial settlement) at a future date, known as the expiry date.
- Deposit a margin – leveraged futures trading increases market exposure and requires traders to deposit a margin, which is a fraction of the total contract value. This margin acts as collateral to cover potential losses.
- Go long or short – Based on your market outlook, you can choose to go long (buy) if you expect the price to rise, or go short (sell) if you anticipate the price will fall.
- Monitor performance – Futures are settled daily through a process called mark-to-market, where gains and losses are calculated based on daily price fluctuations. Your margin account is adjusted accordingly, and additional margin may be required if the market moves against your position.
- Closing the position – To exit your position, you enter an opposite trade, typically before the expiry date. The profit or loss is calculated based on the difference between the price at which you entered the contract and the price at which you close it, avoiding the need for physical delivery.
To determine profit or loss in commodity futures trading, subtract the original trade price from the closing price, then multiply the result by the contract size.
- In a long position, traders would make a profit if the closing price is higher than the original price, and incur a loss if it’s lower.
- In a short position, traders would profit if the closing price is lower than the original price and lose if it’s higher.
In a commodity futures contract, total profit or loss is calculated by multiplying the price difference by the number of units in the contract.
How to trade commodities with CFDs
In addition to trading commodity futures directly on exchanges, you can also trade them through CFDs (contracts for difference), without owning the physical asset, through brokers like Capital.com. You can also use CFDs to speculate on the spot prices if you want to trade current prices. Here’s how each works:
Trading commodity futures with CFDs
Trading commodity futures via CFDs allows you to speculate on futures price movements without the obligations of physical delivery or storage. CFDs provide leverage, enabling you to control larger positions with less initial capital. You can go long (profit from rising prices) or short (profit from falling prices), though leverage also amplifies risks.
On Capital.com, search the platform for the commodity you want to trade, and you’ll see a list of relevant markets. For example, the image below shows CFDs that track the price movements of these specific Crude Oil futures contracts expiring in November 2024 and December 2024, respectively.
- If you expect the price of crude oil to rise, you can open a long position by selecting ‘buy’. If you anticipate the price will fall, open a short position by selling the CFD.
- Monitor the market: Keep an eye on crude oil price movements and key factors like supply and demand, geopolitical events, and inventory reports that impact the oil market.
- Close your position: You can close your trade any time before the contract expires by selling your long position or buying back your short position to realise your profit or loss.
Trading commodity spot prices with CFDs
You can also trade commodity spot prices via CFDs, speculating on the current market price of commodities like oil or gold. Unlike futures, these markets won’t be shown alongside a date, as there is no expiry. Spot CFDs focus on short-term price movements, and, like futures CFDs, they also offer leverage. Again, you can trade both long and short positions, benefiting from market volatility without owning the physical asset. However, leverage can also amplify potential losses, making CFDs trading risky.
You can learn more about trading commodities with Capital.com in our comprehensive guide to commodity trading.