Commodities are the physical goods and raw materials behind nearly every product sold. If it’s needed for building, manufacturing, agriculture, or consumption, there’s probably a commodity market behind it. Some of the most traded commodities include crude oil, natural gas, gold, silver, copper, coffee, sugar, cocoa, and cotton. But you can also buy futures in many other products, such as frozen orange juice concentrate and pork bellies.
Commodities trading is risky, but it can be extremely lucrative to skilled traders with the knowledge, tools, and fortitude to buy and sell to earn a profit from swings in market prices. Here’s a closer look at what commodities are, how they’re traded, and where you can start with a beginner commodity trading portfolio.
What are commodities?
Commodities are raw goods used in manufacturing, agriculture, construction, and other physical products bought and sold worldwide. Your phone’s plastic, metal, and glass could have been traded on a commodities market at some point. And if you open up the fridge or freezer, you’re likely looking at many commonly traded commodities.
These physical goods are traded through various means, including options and futures contracts, where traders can profit (or lose) from changes in the commodity’s market value. Some companies buy futures contracts to lock in prices on something they know they will need in the future. For individual traders, commodities are sometimes profitable, sometimes thrilling, and always fall into the category of high-risk investments.
Types of commodities
With dozens of commodities traded, it’s easiest to think about them using broad categories. Common categories include metals, energy, livestock, and agriculture. Each has various factors influencing pricing.
Economic supply and demand fundamentals come into play here. A bad weather season could lead to a bad coffee crop, for example, leading to higher prices for the foreseeable future. Or OPEC+ could increase production, pushing down crude oil and natural gas prices.
Here’s a brief listing of some top commodities traded in each general category:
- Crude oil
- Heating oil
- Natural gas
- Refined gasoline
Cattle and Livestock
- Lean hogs
- Pork bellies
- Live cattle
- Feeder cattle
How to trade commodities
If you’re game to trade commodities, you have several options to move forward. Depending on your experience, risk tolerance, and the time you’d like to spend researching and trading, the best option may be one or a combination of these commodities trading assets and tools.
To invest in commodities stocks, you’ll have to research the specific commodity and who produces it. For example, a stock investment in gold may lead you to mining companies like Rio Tinto, Centerra Gold, or Newmont Corporation. You could buy oil and gas companies for your portfolio to invest in energy commodities with stocks.
Some investors look to financial and trading firms as well. Major commodity-trading financial companies include Goldman Sachs, Citi, JPMorgan, Bank of America, BNP Paribas, Morgan Stanley, and Macquarie.
Commodities ETFs are a single investment that exposes you to a basket of assets. Themed commodity ETFs focus on commodity stocks or direct investments in the commodities markets.
Examples include SPDR Gold Shares, Invesco DB Agriculture Fund, iShares Silver Trust, abrdn Physical Platinum Shares ETF, and Fidelity Commodity Strategy fund are just a few of the many available funds in this category.
Commodities futures are a direct investment in the commodities markets. With futures contracts, an investor agrees to buy a certain amount of a specific commodity on a specific future date. If the value of the commodity goes up between the time the investor buys and the maturity date, the investor can sell the futures contract for a profit, but if the value goes down they’re stuck selling for a loss. To trade futures contracts, you have to open a special brokerage account. Many online brokers, like Tastyworks and TradeStation.
Retail traders likely don’t want a truckload of cows or a large shipment of orange juice concentrate showing up at their doors, as fun as that might be, so the system is built for the contract to be sold on expiration in almost all cases. However, Wall Street lore tells of traders getting stuck with physical goods when they forgot to sell or couldn’t find a buyer at the last minute.
Investors and traders can purchase options on commodities stocks and commodities futures contracts. Options allow a trader to buy a specified investment on a specific future maturity date. If the underlying asset’s value is above the contract price, or strike price, the contract is “in the money” and profitable. If the value is less, the contract expires unexercised “out of the money.”
You can sell contracts for a profit at any time until the expiration date. On maturity, you can either exercise the contract and keep the underlying asset, such as shares of stock. More commonly, traders exercise the contract and sell the asset immediately, locking in a profit.
For commodities, look for options on stocks focused on specific industries, as discussed above, or for options on commodities futures contracts.
Where to trade commodities
You can trade commodities via stocks, ETFs, and mutual funds in almost any brokerage account. If you are looking to trade futures, however, you will need a special account at a top trading firm. There are different requirements for futures trading at different firms. Here are several to consider:
- Charles Schwab: One of the biggest investment companies in the United States, Schwab offers a huge list of investment products with high-quality trading platforms and low-cost trades.
- E*TRADE From Morgan Stanley: An OG online trading site, E-Trade is now part of the Morgan Stanley investment bank family. E-Trade offers high-end online trading tools with competitive pricing and support for many commodity-related assets.
- Fidelity: Fidelity is another of the biggest brokerage firms in the United States, with a large offering of investment products at some of the industry’s lowest costs.
- Interactive Brokers: Interactive Brokers is focused on professional and active traders. It offers a basic no-cost tier (though it’s hardly basic, with exceptional trading tools) and a more complex paid tier with volume-based discounts. IB supports a huge number of domestic and international assets.
- Tastyworks: Tastyworks is an options-focused platform for active traders, though it also has plenty for long-term investors. It’s a fun and engaging platform with a unique attitude that’s fun for learning about and improving your trading skills.
- TD Ameritrade: TD Ameritrade is another mega online brokerage firm. Its ThinkOrSwim active trading app is an award winner that could be reason enough to choose TD. However, note that it’s in the process of being absorbed into Charles Schwab. ThinkOrSwim access will live on in the future.
- TradeStation: TradeStation is a brokerage focused on professional and active traders. It comes with best-in-class trading platforms and access to a huge variety of trading assets.
Should you invest in commodities?
Commodities trading isn’t for new and beginning investors and traders. If you want to earn long-run returns from commodities exposure, buying stocks or ETFs is likely the best route. If you’re up for doing more research and taking on more risk, it’s possible to earn outsized returns with a well-tuned active trading scheme.
Ultimately, there’s no right or wrong answer. It’s up to you to decide if the risks and rewards make sense. When in doubt, it could make sense to speak with a licensed financial advisor or other investment professional who can give you personalized advice and guidance.
If you decide to invest or trade in the commodities markets, good luck! Keep close track of your investments and trades so you’ll be in the best position to reach your investment goals.
Frequently Asked Questions
Is trading in commodities profitable?
Trading in commodities can be profitable or unprofitable, depending on the trading strategy used. A poorly timed trade could quickly wipe out profits, while expert traders can earn a living from commodities.
How much do I need to trade commodities?
You don’t need millions of dollars to invest in commodities. Many brokerages offer accounts with no minimum balance requirements. Using fractional shares and low-cost options trading platforms, you may be able to start with $10 or less.
Are commodities taxed?
Profits from commodity trades are taxed as capital gains, similar to stocks and other investments. In most cases, you’ll likely recognize short-term gains, which are taxed at a higher rate than long-term capital gains. If you experience trading losses, they can offset your gains for tax purposes.