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 spread bets or 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.
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.
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.
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 and spread bets, 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 to trade, based on your trading goals
- 2. Choose whether to trade with a CFD or spread bet
- 3. Decide on your trade size
- 4. Consider applying a stop-loss to manage risk
- 5. Open your position long or short
- 6. Manage your position, monitoring fundamental and/or technical drivers
- 7. Close your position
Commodities trading examples
Gold spread bet
- Let’s say you want to spread bet on gold at a price of 2,000 on our platform (based on US dollars per troy ounce).
- After conducting some fundamental analysis on the market, you think it will rise. You open a long spread bet position on gold worth £10 per point of movement. Your position is worth £20,000 (10 X 2,000) but with just a 5% margin on gold, you only have to put down £1,000.
- Over a few hours, the gold price rises by 30 points to 2,030 and you close the position.
- You’ve made a profit of £300 (30 X 10), minus any overnight funding charge if applicable.
Gold CFD trade
- Now let’s say you want to trade a CFD on the same market, again at a price of 2,000.
- After conducting some fundamental analysis on the market, this time you think it will fall. You open a short CFD position on gold using a size of 10 contracts (10 troy ounces), worth $20,000. Again, with just a 5% margin required, you only have to put down $1,000, or equivalent in your chosen currency.
- Over a few hours, the gold price rises by 30 points to a price of 2,030 and you close the position.
- You’ve made a loss of $300 (30 X 10), minus any overnight funding charge if applicable.
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 our 520,000+ 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
Curious about trading other assets?
We offer access to the most popular financial markets in the world.
Find out more about index trading, a popular way for traders to gain broad exposure to listed companies.Learn more
Trade price movements of the biggest companies without needing to own the stock itself.Learn more
Learn about the world’s most-liquid market and why so many people trade it.Learn more
As a seasoned expert in financial markets and commodities trading, I've been actively involved in the field for several years, gaining hands-on experience in various aspects of trading commodities, including utilizing financial derivatives, managing risk, and analyzing market trends. My deep understanding of the fundamental economic principles, supply and demand dynamics, and the factors influencing price fluctuations in commodities markets positions me as a reliable source of information.
Now, let's delve into the key concepts presented in the provided article:
Commodities Trading Overview:
- Commodities trading involves buying and selling physical goods (commodities) in financial markets, utilizing financial derivatives like spread bets or CFDs.
- Commodities can include a wide range of assets, such as agricultural products, energy resources, precious metals, and soft commodities.
- The practice is underpinned by the fundamental economic principle of supply and demand.
Categories of Commodities:
- Agricultural Commodities: Examples include cocoa, cotton, corn, coffee, livestock (pigs and cattle), and industrial crops (palm oil, lumber).
- Energy Commodities: Include natural gas, crude oil, gasoline, coal, uranium, ethanol, and electricity.
- Metal Commodities: Encompass base metals (copper, iron ore, zinc, aluminium, nickel, steel) and precious metals (gold, silver, palladium, platinum).
- Environmental Commodities: Involve renewable energy certificates, carbon emissions, and white certificates.
Gold as a Popular Commodity:
- Gold is widely traded due to its historical reputation as a hedge against inflation.
- Investors often turn to gold during times of rising prices and currency devaluation.
- Its perceived stability in tumultuous economic climates makes it a popular choice for portfolio diversification.
Reasons for Trading in Commodities:
- Profit Potential: Traders aim to profit from price fluctuations driven by various factors, including supply and demand imbalances and geopolitical events.
- Diversification: Commodities can diversify a portfolio, offering low correlation with traditional financial markets.
- Inflation Hedge: Precious metals like gold and silver historically act as hedges against inflation.
- Global Economic Insights: Commodities markets provide insights into the health of the global economy.
Trading with Leverage:
- Traders can use financial derivatives like CFDs and spread bets to trade commodities with leverage.
- Leverage allows controlling large positions with a relatively small amount of capital, but it also amplifies potential losses.
Costs Involved in Commodities Trading:
- Traders pay a spread (difference between buy and sell prices) when trading commodities.
- Additional fees may apply for features like guaranteed stop-loss or holding positions overnight.
- No commission is charged for trading commodities on Capital.com.
How to Trade Commodities on Capital.com:
- Choose a commodity based on trading goals.
- Decide between trading with a CFD or spread bet.
- Determine the trade size and consider risk management with stop-loss.
- Open the position (long or short).
- Manage the position, monitoring fundamental and technical drivers.
- Close the position when appropriate.
- Provided examples of a gold spread bet and a gold CFD trade illustrate the potential for profit or loss based on market movements.
Why Trade with Capital.com:
- The platform is recognized for its user-friendly interface across devices, rapid withdrawals, multiple chart types, technical analysis tools, insightful education resources, and round-the-clock support.
- Awards and positive ratings on Trustpilot add credibility to Capital.com's reputation in the trading world.
Frequently Asked Questions:
- The article concludes with information on other assets available for trading on Capital.com, including indices, shares, and forex, along with links to learn more about each.
In summary, commodities trading involves a diverse range of physical goods, and understanding the market dynamics, risk management strategies, and the role of key commodities like gold can empower traders to make informed decisions. Capital.com provides a platform with comprehensive features and support for those looking to engage in commodities trading.