How to trade commodities

 Commodities are most often traded on futures exchanges, which allow traders to speculate on future prices.

Commodity buyers, such as manufacturing companies, also make physical purchases to take delivery. As a trader, you can use commodities in a number of different ways, depending on your experience and the approach you prefer.

Commodity futures

If you have an account with a brokerage that offers futures, you can buy and sell contracts on a futures exchange. When you trade commodity futures, you enter into an agreement with another investor based on the price at which you expect the commodity to trade on a specified date.

Commodity options

Commodity options are derivatives based on futures contracts on an underlying asset. Options contracts give the holder the right to buy or sell the underlying commodity at a specified price (known as the strike price) at a specified date in the future. You profit if the price moves to the strike price before the expiration date, or lose the money paid for the contract if the price moves against the position.

Purchases of physical commodities

Speculating on price using derivatives can be a better way to trade a commodity for retail investors, as you are unlikely to want to accept physical delivery. But if you want a physical asset like a gold bar or a barrel of oil, you can buy it from a dealer and keep it safe.

Commodity stocks

What are commodity shares? An alternative to speculation directly on the price of a product is to trade shares of a company operating in this sector.

For example, you might invest in shares of an oil refinery or a copper mining company, as the share price can respond to changes in the price of the underlying commodity.

You should remember that a company's stock does not directly track commodity prices, and the stock price can also go against your expectations, causing losses, because the stock is influenced by other factors such as the strategy and fundamentals of the company's management.

Commodity ETFs

For traders seeking broader market exposure, there are exchange-traded funds (ETFs) and exchange-traded notes (ETNs), which pool investors' money to create portfolios that track the price of a single commodity or basket of commodities.

ETFs can buy futures contracts or invest in stocks of commodity companies. They can offer instant access to a variety of assets that may take longer to build. However, ETFs charge management fees and, depending on their composition, may not provide the same returns as the asset it is intended to track.

Commodity pools and managed futures

There are private funds that invest in commodities, but unlike mutual funds, they are not public, so you must get permission to buy from them. Commodity pools and managed futures funds can employ more complex trading strategies and offer the potential for greater returns than ETFs and other funds, although management fees are usually higher as a result.

CFD trading

One of the popular ways to trade commodity markets is through contracts for difference (CFDs). A CFD is a type of contract between a trader and a broker that allows the latter to speculate on the difference in price between the opening and closing of a trade. 

When trading CFDs on commodities, you do not own the underlying asset, but only speculate on its price fluctuations. Thus, CFD trading does not involve the payment of additional storage fees, as in the case of physical delivery of commodities. Using CFDs to trade commodities will allow you to go long or short without having to deal with conventional commodity exchanges .

There are important differences between buying commodities and trading commodity CFDs. Because of the overnight fees required to maintain a position, CFDs are not typically used as long-term investments.

  We wish you successful trading with ArtCap !