Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

How to trade on commodities: a complete guide

Published on: 16/12/2021 | Modified on: 16/09/2022

In this guide, we’ll explain the definition of a commodity, what moves commodity prices, along with how to get started with commodity trading using derivatives such as spread bets and CFDs at spot or future prices.

We offer over 100+ tradeable raw materials on our platform, including crude oil, gold, natural gas, coffee, and wheat, so read on to discover how to become a commodity trader.

KEY POINTS

  • Commodities or raw materials can be split into two categories: soft and hard
  • Examples include agricultural goods, precious and base metals, and energy sources
  • These assets can be particularly volatile as prices are affected by external factors such as climate, supply and demand, natural disasters and politics
  • When trading derivatives, you don’t own the physical commodity, so storage and transportation isn’t a concern
  • You can speculate on commodities through spot (cash) and futures (forwards) contracts

What is a commodity?

A commodity is a physical good that can be bought or sold on the commodity market​. The debate of commodity vs product relates to the beginning and end of the production process. A commodity is a raw material that is used in the manufacturing of commercial goods, and the product refers to the physical goods as a result.

Commodities can be categorised into either hard or soft varieties:

  • Hard commodities are natural resources like oil, gold and rubber, which are often mined or extracted.

  • Soft commodities are agricultural products such as coffee, wheat or corn.

The most widely traded examples of commodities have well-established markets, with around 50 major commodity exchanges globally. The first example of an organised exchange for trading commodities dates back to Amsterdam in 1530. These days, there are a whole host of markets available to trade with just a few clicks of a mouse or taps on your mobile device, but some commodities remain as popular as ever.

Each commodity comes with a commodity code: a 10-digit number that helps to identify import and export restrictions from outside the EU. This includes duty and VAT ratings that you may be charged and import licenses that you may have to declare when introducing a commodity to customs.

There is a wide range of commodities you can trade, although it’s the energy markets, in the form of oil and gas trading, and metal markets, in the form of gold and silver, that tend to be more popular with commodity traders these days. The most actively traded commodities will differ depending on how the markets are performing.

For instance, a highly volatile petroleum market may attract more price speculators. This increases both volume and open interest:

  • Volume relates to the total number of contracts that are being traded.

  • Open interest is the total number of open long and short positions in a market.

Commodities with high volume are often the most popular ones to trade. Low volume commodity markets can be prone to higher volatility or even wild price swings. The topic of 'most valuable commodity' depends on many factors: the political, social and economic stability of a region and external factors such as weather conditions and natural disasters that can ruin agricultural commodity production, for example.

The below table shows some of the most popularly traded commodities on our commodity trading platform​​, Next Generation.

Instrument Price Day Week Trend
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Pricing is indicative. Past performance is not a reliable indicator of future results.

New to gold trading?

Discover why gold is considered so valuable in the financial markets and how you can spread bet or trade on our gold bullion price to hedge against stock market risks.

More on spot gold trading

How does commodity trading work?

Commodity trading covers the buying and selling of a large range of raw materials. Investors can buy and sell commodities through either futures contracts on an exchange, or forward contracts​ over-the-counter (OTC). This effectively means that prices are agreed upon months in advance, and these exchanges standardise the quantity and minimum quality of the commodity.

For example, the London Commodity Exchange might stipulate that 5,000 bushels comprise one wheat contract. It would also state which grades of wheat could be used to satisfy the contract. All wheat that meets that grade and criteria will be sold for the same price, regardless of where it was grown, and any slight variations in quality.

In the physical commodities market, there will be an actual exchange of goods. A breakfast cereal producer might also buy a futures contract for corn with a delivery date months in the future. This way, buying under a futures contract will protect the buyer if the future market price of corn is higher than the agreed price. The certainty that the transaction will take place allows both parties to plan and budget confidently.

Many commodity traders, however, do not take physical ownership of the goods. Instead, they can take a financial position (long or short) on a commodity using derivative products such as spread bets (UK and Ireland only) or contracts for difference (CFDs). This will depend on whether they think the value of the asset will rise or fall.

What is a commodity trader?

A commodity trader is involved in the exchange of raw materials. The daily trading efforts of commodity traders are often driven by a mix of fundamental and technical analysis. Traders stay up to date with the news on commodities to ensure they are aware of the macro-environmental forces that drive their prices, and then utilise technical analysis to make entry and exit trading decisions based on past trends.

Open a commodity trading account

What are the different types of traders?

Agricultural traders

Agricultural commodities are staple products and often provide a source of food for the global market. These include grains, livestock and dairy products, as well as lumber. Agricultural trading is characterised by a dynamic market that is often influenced by a number of factors, including population growth, global demand, global warming and technology. However, the markets are generally expected to rise given the growing number of people and the rising wealth of consumers in growth markets.

Instrument Spread Margin rate
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Precious metals traders

Precious metals are often seen as safe haven investments​ due to their stability and reputation within the financial markets. They are often bought by governments, banks, hedge funds, and traders alike. For example, many traders use gold to diversify their portfolio risk, which is achieved by hedging against stock market risks, such as global inflation or political instability. This is because unlike fiat currencies​, gold often maintains its purchasing power in periods of prolonged inflation or market instability.

Instrument Spread Margin rate
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Energy traders

The energy markets are also popular among commodity traders. The advent of renewable energy trading​ has generated added interest for commodities such as national gas, heating oil, and gasoline. As with the oil markets, world events and politics can have an impact on the energy markets, so it is wise to keep an eye on news and economic releases. Some sources of energy cannot be invested in directly as a commodity, such as uranium, which is used for nuclear power stations. Instead, traders must gain exposure to uranium through uranium stocks and ETFs​.

Instrument Spread Margin rate
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Expecting big things in energy?

Diversify your portfolio and spread risk with our unique commodity indices, which allow you to take a view on a commodity sector as a whole with a single position.

Explore our commodity indices

How to trade on commodities

  1. Choose your product. You can either spread bet tax-free* or trade CFDs​, which are both types of financial derivatives.
  2. Choose your instrument. Decide whether to buy (go long) if you think prices will rise or sell (go short) if you think prices will go down.
  3. Enter a trade size. Decide on the amount per point movement (spread betting) or how many units (CFDs) you want to trade. When trading CFDs, the value of one unit can vary depending on the instrument.
  4. Manage your risk. Select from a range of stop-loss orders, including GSLOs, which work exactly the same as regular stop-loss orders, except that for a premium, they guarantee to close you out of a trade at the price you specify regardless of market volatility or gapping.
  5. Monitor your position. After placing your trade, monitor your open positions (including any stop-loss or take-profit orders) to follow your real-time profit or loss. Please remember that losses can exceed your deposits.


By opening a live account with CMC Markets, you can deposit funds to start trading commodity derivatives now, or practise first on our risk-free demo account.

What are commodity derivatives?

At CMC Markets, we offer two types of leveraged derivative trading accounts that can be used for speculating on the commodity markets. You can open either a spread betting or CFD trading account, both of which are similar in their function but have some unique features.

Spread betting commodities

Commodity traders can open a spread betting account to trade on price movements in commodity markets. Spread betting is a tax-efficient* method of trading as it’s free from capital gains tax and stamp duty. Please note that spread betting is only available to customers who reside in the UK or Ireland.

Commodity CFDs

CFD trading is available globally, so traders can speculate on commodity markets wherever they reside. When trading CFDs, you have to pay capital gains tax, but trades are exempt from stamp duty. However, unlike spread betting, you can offset profits against losses for tax purposes.

Commodity ETFs

It is also possible to trade on the price movements of exchange-traded funds​​​ (ETFs) using the above account types. Commodity ETFs invest in physical commodities, such as agricultural goods, energies, and precious metals, and track the performance of these materials through either spot or future contracts. These types of funds provide traders exposure to the physical commodity market without actually having to store or directly own the goods, which may be beneficial to many.

Some examples of commodity ETFs that you may spread bet or trade CFDs on include:

Interested in coffee?

Discover the different types of coffee that you can trade, from Arabica to Robusta, and the factors that move this soft commodity’s price.

How to trade coffee

Commodity futures vs cash/spot prices

There are two ways in which commodity traders can get involved with speculating on raw materials. This is through:

  • Spot (cash) contracts: fixed price for immediate payment and delivery.

  • Futures contracts: an agreed price to be settled at a future date.

The difference between the two prices is called the basis, which tends to fluctuate often as there are many external factors that can have an impact on commodity prices.

One way to decipher whether the future value of a commodity may provide greater returns is through using contango and backwardation​. At CMC Markets, we offer commodity forwards, which are based on the underlying price of a futures contract and therefore depend on the stability of the asset. Learn more about forward trading​ with us.

What moves commodity prices?

The price of a commodity is reflected by its intrinsic value within the market, otherwise known as the 'commodity value’. This can change depending on market changes and updates. Some of the main drivers of price changes include supply and demand, seasonality, geopolitics, and storage and transportation concerns.

News trading involves following and responding to current social, political, and economic changes, which can be beneficial to both short and long-term traders.

For example, if a report was published stating that demand for gold has hit a ten-year low, many traders would look to sell gold over fears that its value is likely to decrease. A sudden rise in the number of people selling gold could have an impact on your trades, as it would push gold prices lower, and the value of gold would increase. Gold prices can also affect the price of copper, silver or other precious metals as well.

Many commodity traders take news releases and economic events into account in order to build an event-driven trading strategy​. They may constantly monitor and analyse the factors that are likely to affect the relevant commodities market, hoping to benefit from any changes in price movements.

What are some advantages?

  • Diversification: Commodities provide the opportunity to diversify your existing trading or investment portfolio. Trading in commodity markets can also provide a greater deal of diversification in comparison to other securities, as they often have a low or negative correlation when compared to other major asset classes.

  • Inflation: Inflation can cause currencies to depreciate, which can lower the value of many financial assets such as stocks and bonds. However, commodities tend to hold their relative value during periods of high inflation, hence why many investors turn to precious metals such as the ‘safe haven’ of gold in uncertain times.

  • Liquidity: The commodity market is generally known as a highly liquid market when compared to real estate or penny stocks. This is especially the case when popular commodities such as gold, oil or natural gas are in question.

  • Volatility: Volatility in a commodity market can be perceived as both an advantage and a risk. It can be an advantage if you are able to predict when there will a jump in a commodity’s price, for example, if there is war in a major oil producing country such as Iraq. Smart investors can quickly realise the macro forces that could impact the specific commodity markets and can capitalise on these forces.

What are some risks?

  • Value of commodities: Although rare, when trading commodities, you undergo the risk of a more efficient process or relevant product being invented that can largely devalue some commodity markets. An example of this was in the 1980s, when massive amounts of silver were consumed as part of silver-based imaging in photography films. However, due to the rise of digital cameras without the need for films, the demand for silver dropped for this use, causing the overall demand and thus the price of silver to fall.

  • Demand: Demand within commodity markets presents a major risk for commodity traders. The value of gold, oil and other commodities are difficult to predict, and an incorrect speculation on your behalf can result in a losing trade.

  • Volatility: A double-edged sword, volatile markets can present a commodity trader with great opportunities for both profit and loss.

New in the oil market?

Discover how to trade on the price movements of Brent and WTI Crude Oil, as well as other tips and tricks to getting involved with this volatile energy commodity.

Guide to oil trading

FAQs

What are the 3 types of commodities?

Commodities are generally sorted into categories, including precious metals (gold, silver), agricultural (wheat, coffee), and energy (crude oil, natural gas). Learn how to trade on commodities.

What is a commodity forward?

Rather than buying commodities at spot price, a commodity forward allows a buyer and seller to agree on a transaction with a future date and price in mind, usually with the buyer’s intention of selling it later for a higher amount. Learn more about forward contracts.

How do I become a commodity trader?

In order to become a commodity trader with CMC Markets, open an account and choose whether you want to spread bet or trade CFDs on our range of commodity derivatives, including gold, crude oil Brent and WTI, sugar, live cattle, and heating oil. You can take a position on both sides of the market depending on whether you think our prices will rise or fall in value.

What are the margin rates on commodities?

Our margin rates for commodities start at 5% for gold and 10% for other commodities. This means that if you invested £5,000 into trading on gold, you would control a full trade value of £100,000, and £50,000 for all other commodities. However, please note that your profits and losses are magnified, as they are relative to the full trade value. See our guide to leverage in trading for more information.

Is commodity trading good for beginners?

The commodity market can be a good introduction to the financial markets for beginner traders, although remember that every asset comes with its own set of risks, especially volatile energy commodities. As a start, read our beginner articles on how to trade oil and how to trade gold.


*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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