What is commodity trading and how does it work?

Dive into the commodity trading market and understand how the world's most valuable resources like gold and oil are traded.

Firstly, what are commodities?

A commodity is a raw physical asset that can be bought or sold on the open market. 

Commodities can be split into two categories: soft commodities and hard commodities. Precious metals like gold or silver, and energy such as oil, are considered hard commodities, while agricultural products – like coffee or cocoa – are considered soft commodities.

What is Commodity Trading?

Commodities in front of a laptop graphic

Commodity trading involves speculating on the price of a raw physical asset, such as gold or oil. Many factors, including supply and demand, will impact the market price as traders buy or sell a commodity CFD making a profit or a loss. 

When you trade commodities, you don’t take ownership of the underlying physical asset (for example, a bar of gold). Instead, you trade a “futures contract”, also known as Contracts for Difference (CFDs) that gets derived from the real-time price movements of the underlying asset. So if the purchase price of gold goes up, the traded price does too. 

While this concept might sound confusing at first, a CFD trade is simply an agreement between the buyer and seller to complete a transaction for a set price and duration. Find out more about how to trade commodities.

To complete a commodity CFD trade, you need the following details:

  • Contract size: The amount of the commodity stated in the contract – either metric/traditional units (barrel/bag) need to be specified.
  • Price: The price of the contract is determined through fair price discovery between the buyer and the seller. In the case of a futures contract, it can specify the price to be paid at a predetermined date in the future.

 

What are the types of commodities on the market?

Commodities can be categorised into two types: 

  • Hard commodities: A hard commodity is mined from the earth or extracted from natural resources.
  • Soft commodities: A soft commodity can be grown on agricultural farms or extracted from another parent substance.

These can be further split into four sub-categories: metals, energy, agriculture and livestock.

 

What commodity CFDs are available at Axi?

The following table shows all the commodity cash CFDs, commodity future CFDs and bullion spot CFDs available to trade with Axi.

 Bullion Spot CFDs  
Symbol Market Description
XAGUSD Silver vs US Dollar
XAUAUD Gold vs Australian Dollar
XAUCHF Gold vs Swiss Franc
XAUEUR Gold vs Euro
XAUGBP Gold vs British Pound
XAUUSD Gold vs US Dollar
XPTUSD Platinum vs US Dollar
 Cash CFDs  
Symbol Market Description
USCRUDE US Crude Oil
UKCRUDE UK Crude Oil
USOIL US Crude Oil
UKOIL UK Crude Oil
 Futures CFDs  
Symbol Market Description
BRENT.fs Brent Crude Futures CFD
COCOA.fs Cocoa Futures CFD
COFFEE.fs Coffee Futures CFD
COPPER.fs Copper Futures CFD
GOLD.fs Gold Futures CFD
NATGAS.fs US Natural Gas Futures CFD
SILVER.fs Silver Futures CFD
SOYBEAN.fs Soybean Futures CFD
WTI.fs WTI Crude Oil Futures CFD

What causes the price of commodities to change?

There are many factors that influence the price of a commodity in the market, including supply and demand trends, inflation and cost of production. It’s important to stay up to date with economic news and market trends so that you have a greater understanding of how prices are affected.

Supply vs demand

The fundamental rule in the market is that commodity prices will rise with an increase in demand. This ties in with income and population, the cost of production of the commodity, and the actions of governments and producer organisations.

Commodity production

Production of commodities is influenced by natural factors like weather and crop conditions, cultivation land, trade constraints, subsidies, taxes, and production-related factors like labor patterns, development in farming tools & technologies used.

Cost of production

Commodity production costs include raw materials, labor/wages, research and development, insurance, licensing fees, taxes, and much more. An increase in production costs will have a direct impact of the price of the commodity being produced.

Economic growth

The prosperity of a country indicates the purchasing power of its population. This effect is more obvious in countries that are major producers or consumers. As the economy grows and urbanises, they typically consume a larger amount of commodities.

What are the advantages of trading commodities?

There are many advantages of trading commodities and unique aspects that this market has over other markets.

Liquidity

Liquidity

Commodity futures offer high liquidity, giving investors the opportunity to liquidate their positions whenever required.

Low margin

Low margin

The margin deposit required to start futures trading can be as low as 5–10% of the total value of the contract.

Hedging capabilities

Hedging capabilities

Investing in commodities as a hedging instrument can help you with risk management.

Portfolio diversification

Portfolio diversification

Commodities can give traders much-needed diversification to their portfolio.

Protection against inflation

Protection against inflation

Commodities can maintain their value and price even during times of high inflation.

Leverage

Leverage

Open larger positions using leverage with smaller initial upfront margin.

What are the risks of trading commodities?

Despite there being many advantages to trading the commodities market, there will always be risks. So, to be successful trading commodities it is imperative to understand and apply thorough risk management practices.

Volatility

Volatility

Supply & demand have a huge influence on the price of a commodity. Traders need to be mindful of all the trends in the market in order to speculate on a commodity’s price.

Less control over conditions

Less control over conditions

There’s no warning of an upcoming economic crisis that can affect the market price of a particular commodity meaning traders have less control over market conditions.

Market inexperience

Market inexperience

Investors must be aware of volatility that can be caused by political, economic & currency instability, with market inexperience in commodity trading a risk for traders.

Discover more markets to trade with Axi

Choose from a variety of global markets to trade with Axi, using ultra competitive spreads & flexible leverage to trade your edge.

Commodities trading FAQs

The spot price for a commodity is the local cash price for immediate purchase and delivery of the commodity. It indicates the current quote for the commodity and means that the trading of the commodity is done "on the spot" - hence the name. In a spot market, transactions are settled within a few days.

The futures price for a commodity means agreeing on a predetermined price for the transaction that will occur at a later date in the future. This set “future’s price” is calculated as follows:

Commodities current spot price plus the cost of storage or cost of carrying in the intermediate period before delivery. The latter price in the equation also includes interest, insurance, and other incidental expenses.

Stay up to date on the latest news with our daily and weekly oil trading market analysis and outlooks at the Axi blog.

Keep yourself educated on all things gold, silver and copper by following our expert market analysts with weekly precious metals updates.

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