Metals

Energy commodities

Energy includes the fossil fuels – oil and gas, and the renewables, like wind power and biofuels. Although ethanol and electricity generation are growing in importance as tradable commodities, the most developed commodity trading markets are in non-renewable energy resources such as petroleum.

Agricultural commodities

Most agricultural or soft commodities are staple crops grown or raised for human consumption, and include grains, coffee, corn and livestock.

Some experts consider livestock and meat to be a separate category from other types of agricultural produce. Live cattle, feeder cattle and pork bellies are all part of this sector.

A proportion of agricultural commodities such as timber have purely industrial applications, and some biofuels stocks are now grown. Soft commodities are important in futures markets where people speculate on price fluctuations as supply and demand changes. They are also used by farmers who produce these commodities to lock in the future price of their produce, and by commercial consumers and resellers of these goods.

Metals and mineral commodities

Metals and minerals are referred to as hard commodities. These are resources that are generally extracted through mining, specifically metals. Metals that are traded include precious metals such as gold, silver or platinum, and industrial metals. These include nonferrous metals, such as aluminium, lead or copper, and ferrous metals, iron and steel.

How are Commodities traded?

Commodity trading often takes place within specialized commodity exchanges, and the oldest dates back to Amsterdam in 1530. Since then, commodity exchanges have developed around the world, and many specialize in commodities. For example, the London Metal Exchange (LME) only deals with metals. The Chicago Mercantile Exchange (CME) deals with livestock commodities including milk, cattle, pork bellies and lean hogs.

These exchanges were once physical marketplaces where traders gathered, but these days the definition is broader. A commodities exchange is now more likely to be a legal entity that has been formed to provide trading facilities and enforce rules for the trading of standardized commodity contracts and investment products based on commodity trading. You can now trade commodities online in a number of different ways – one of which is CFDs (contracts for difference).

What drives Commodity markets?

Commodity prices can fluctuate wildly because of changes in supply and demand. For example, when there’s a big harvest of a certain agricultural crop, the price usually goes down. When harvests might fail prices rise as buyers to pay more to secure the supplies they need. A food manufacturer will want to ensure that the price it pays for wheat will be consistent – or at least predictable.

Hard commodities and particularly energy can fluctuate with the economy in general. During a downturn, for example, the price of petroleum will tend to fall, as there is less demand for fuel of vehicles, from aircraft and shipping to road transport.

There will also be short term seasonal fluctuations in commodity prices. During cold weather, demand for natural gas for heating rises, causing prices to rise too.

Commodity markets exist to provide more efficient prices and security for consumers of those commodities. The ability to buy a supply of wheat, for example, at a known price in six months’ time allows bread manufacturers to make more accurate financial projections for their business, and protect themselves from the effects of a bad harvest which would put up the price of their raw materials.

How can you profit from commodities with CFDs?

Simple commodities trading is the buying and selling of stocks of raw materials and involves the physical trading of goods.

CFDs (Contracts for Difference) allow traders to speculate on the way the price of a commodity will change, without ever owning the commodity itself.

A CFD is a contract between a trader and a broker. Traders who expect the price to go up will buy CFDs in commodities. Those who expect a fall will open a sell or ‘short’ position. The profit (or loss) comes when the trader decides to close their long or short position, and the contract is closed.

At the end of the contract, the two parties exchange the difference between the price of the commodity at the time they entered into the contract, and its price at the end. Being able to make a profit in a falling market as well as a rising market is a feature of CFDs and particularly attractive when markets are volatile.

How are commodities traded?

Commodities are standardized for quality, which means they’re priced the same regardless of who produced them, allowing them to be bought and sold on exchanges, like stocks. Well-known exchanges include the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX) and London Metal Exchange (LME).

Commodities trading at these exchanges is based on the buying and selling of raw materials and the physical trading of goods. But commodities brokers also trade futures, to allow producers and consumers to secure financial stability and accurate financial forecasting.

This involves futures contracts.  Futures contracts are standardized agreements or contracts with obligations to buy or sell a particular asset at a pre-set price with a future expiration date. These were originally developed for producers and industrial consumers as a hedge against price increases or decreases, but also allow opportunities for speculation.

Commodities trading with CFDs

CFDs (Contracts for Difference) are a derivative instrument that can be used to trade commodities.

CFDs allow traders to speculate on the way the price of a commodity will change, without ever owning the commodity in question.

A CFD is a contract between a trader and a broker with a set end date. Traders who expect an upward movement in price will buy the CFD, while those who see the opposite downward movement will open a sell or ‘short’ position. At the end of the contract, the two parties exchange the difference between the price of the commodity at the time they entered into the contract, and its price at the end.

So if you opened a long (buy) CFD trade on gold when gold was priced at $1,500, and you closed the trade after the price of gold rose to $1,600, you would make a profit on the difference in the gold price, or $100. If the price fell to $1,400, you would make a loss of $100.

In practice, it’s important to remember that your trading profit isn’t simply the difference between the opening and closing price of the trade – you also need to consider the costs of trading.

In simple terms, the trader is paying the difference between the opening and closing price of the commodity they are trading. What makes CFDs exciting is the fact that you can also go short, allowing the potential to make a profit when the price of a commodity falls. Being able to make a profit in a falling as well as a rising market is particularly attractive when markets are volatile.

CFDs can be simpler than other financial instruments like options and futures. The relative ease of entering and exiting positions has helped make trading commodity CFDs popular, but there are a number of other benefits.

The first is the easy availability of CFDs. Commodities are traded globally, and traders can trade twenty-four hours a day, five days a week, accessing opportunities from a range of commodities and exchanges all around the world.

Perhaps even more important is leverage. This means that a trader can trade positions many times the amount that they have. Leverage is a key feature of CFD trading, and can be a powerful tool for a trader, who can use it to take advantage of comparatively small price movements, or simply make their capital go further. Leverage works by using a deposit, known as margin, to provide increased exposure to an underlying asset. It means putting down a fraction of the full value of the trade.

It can be a powerful way to increase exposure and potential profit, but it can also amplify losses.

What moves a commodity’s price?

Commodity traders undertake fundamental analysis and technical analysis to forecast market movements. They aim to buy when the price is low, which is usually determined by an abundance of supply and falling demand. They sell when they believe the supply is outweighed by the demand, which can result in a profit.

Commodities prices are driven by the forces of supply and demand. Huge price swings can occur when scarcity or abundance of a commodity suddenly looks likely. These can be triggered by regular events, such as seasonal demand, or less predictable factors, such as a bad harvest, or developments in a particular industrial sector, a national or regional economy, or even global events.

However, unlike some other types of market, these factors can often be easy to see, understand and at times predict. This can help make commodities attractive for anyone with an understanding of the factors that will influence the price of a particular commodity.