Top Commodities to Trade
Updated 26 February 2021
ETORO - THE #1 BROKER
In the context of trading, commodities fall into two categories:
- The first category is raw material. This category would include gold, silver and crude oil.
- The second category is agricultural product, such as corn and coffee.
Why Choose to Trade Commodities?
There are many reasons why you would choose to trade commodities as part of your portfolio:
- Commodity values are generally based on supply and demand, a factor which you can monitor to predict the rise and fall of a commodity value and hence whether to buy or sell.
- There are several ways to invest in commodities, the most commonly-used methods being standard buying and selling, futures contracts and CFDs.
- In uncertain and turbulent times, certain commodities are more likely to retain their value regardless of external factors. This generally makes them a safer investment.
- Commodity prices can vary greatly, swinging from high to low on a regular basis, and therefore can provide you with the opportunity to make generous profits.
- Commodities can provide an excellent way to diversify your portfolio.
Factors to Consider When Choosing a Commodity to Trade
Commodities may provide an excellent option for your trading portfolio but how do you decide which are the best ones to trade?
When making your decision, consider the following factors:
- What is the liquidity of the commodity? How easy is it to buy and sell the commodity? How high or low is the supply and demand of that material? If you buy this commodity, are there sufficient traders available to buy from you at the price you want to sell at?
- What is the related geo-political environment? For instance, is the supply of a commodity low because of an ongoing war in the country that is the main supplier of that commodity, or have economic sanctions been enforced on one of the main suppliers?
- What is the future of this commodity? For instance, in the case of fossil fuels, these may become scarce in the future, reducing the supply – which could increase the demand. But they may also become less popular as green energy sources (such as solar power) are taken up by consumers and manufacturing methods move away from the use of fossil fuels, hence reducing the demand.
- What trading method do you want to use? Are you interested in futures contracts, CFDs or standard trading where you buy the commodity now and sell it when you can make a profit?
Read Stocks vs CFDs: The Key Differences to find out which investment method best suits your needs.
Considering all of the above factors will demand a high level of research and ongoing assessment by you as a trader.
Where Can You Trade Commodities?
You can trade commodities through a broker. However, choosing the right broker for you will depend on:
- The trading method you want to use, such as a CFD
- The broker’s experience with the commodity you are interested in
- Other factors such as pay-out dates, etc.
Your choice of trading method will decide how much money you must invest. For instance, if you wish to invest in a commodity worth $1,000, using leverage to purchase a CFD would mean paying out a fraction of the full $1,000.
In comparison, using standard trading methods would require an outlay of the full $1,000.
On top of your investment, you will incur broker fees.
Here are a few options for trading commodities. Always do further research before deciding on the best on for you.
eToro brokers both stocks and CFD trading opportunities, although for commodities, only CFDs and spread betting are offered.
It operates across 19 commodity markets.
Its patented software CopyTrader puts the trader in control, providing you with the opportunity to copy top-performing trader portfolios.
eToro customers can take advantage of an online community of traders too.
CMC Markets is an established trading provider operating across a wide range of markets, making it an ideal provider for both stock and CFD investments.
It offers CFD and spread-betting when trading in commodities. It operates across 33 commodity markets.
CMC has a mobile trading app, making trading on the go an easy option.
*67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.*
IG is a global, award-winning trading provider, established in 1974. IG offers commodities trading across DMA commodities, CFDs and spread-betting. It operates across 38 commodity markets.
If you are interested in using an app to trade, read Top 11 Stock Trading Apps for more information.
The Top 10 Commodities to Trade
The popularity of commodities varies as much as their prices, but here is a list of the most traded commodities:
Gold is one of the most regularly-traded commodities and is a precious metal that is continually in demand.
Gold is rare, increasing its competitive demand, at an estimated 170,000 tonnes worldwide.
Used widely in the jewelry trade, gold is also purchased as an investment in its bar and base form and used to a lesser extent in industry. Gold is mainly sourced from China, Russia, Australia and the US.
As a commodity, the value of gold generally remains unaffected by inflation or geo-political factors and is hence seen as one of the safer commodity investments.
Another precious metal, as a commodity, silver shares many of the attributes of gold:
- Rare and therefore in high demand
- Used in the jewelry trade and industry
- Generally seen as a safe investment
However, due to the greater percentage of the silver supply that is used in industry, for instance, for solar panels, it may be more greatly affected by economic downturns.
3. Crude Oil
The first of the fossil fuels on our list, crude oil is not simply a source of energy. It can also be used for:
- Production of textiles
- Production of fertilizers
- Production of steel
So, while green energy becomes increasingly popular, crude oil is likely to continue to be in demand for the foreseeable future.
The greatest price driver of crude oil is supply and demand, and the factors that most affect crude oil pricing are geo-political and economic developments.
4. Natural Gas
The second of the fossil fuels in this article, natural gas is used as an energy and fuel source. It too relies on supply and demand to arrive at a price but is a rarer material and more expensive to source than crude oil.
Unlike crude oil, the price of natural gas is often driven by our weather conditions; colder weather, for instance, creating a higher demand for natural gas and therefore driving up the price.
Again, in the face of the increasing popularity of green energy, the demand for natural gas may be affected.
With its ability to conduct heat and electricity and its resistance to corrosion and the effects of the weather, copper has many industrial and manufacturing applications:
- Electrical wires
- Roof tiles
- Industrial machinery
- As part of an alloy
Copper is widely available and one of the most used metals globally. Both supply and demand are therefore high.
With the high demand for copper in industry, the factor that most greatly affects the price of copper is the health of the local and global economy.
Currently one of the most volatile agricultural commodities on this list, coffee is widely consumed and produced.
The major producers of coffee are Brazil, Vietnam, Colombia, Indonesia and Ethiopia.
Numerous factors affect the price of coffee:
- Political and economic turmoil in the producing countries
- Weather conditions and their affect on coffee bean crops
- Transportation costs, which may, in turn, rely on the price and availability of oil
- The US dollar rate
- Public opinions towards the consumption of coffee
7. Soy Beans
Soy beans are widely used, high in protein and inexpensive to produce. The main producers are the US, Brazil, China, Argentina and India.
Besides their basic use, soy beans are also instrumental in the production of:
- Animal feed
- Meat substitutes
- Soyabean oil
- A substitute for milk
Factors that may affect the price of soy beans include weather conditions, demand for the products that soy beans are used to create, and the price of the US dollar.
8. Iron Ore
Iron ore is widely available and a relatively easy commodity to mine.
Historically, supply has matched demand, lending iron ore a relatively stable price.
However, the recent urbanization of China and its increased demand for iron ore to manufacture steel has led to a shortage of iron ore in comparison to demand. This has driven up the price in 2020.
Iron ore has a wide range of uses:
- Cast iron
- Steel production
- Industrial catalysts
As with soy beans, corn is widely produced and used, and its price is dependent on the demand for the products it is used to create.
Corn is used to make:
- Food products
- Animal feed
- Industrial products
The price of corn may also be affected by environmental conditions and the effects on the corn crop, and the price of the US dollar.
Steel is created from iron ore and carbon, and on occasion, other elements such as manganese and tungsten. It may also be recycled through electric arc method furnacing.
It is relatively inexpensive to produce, strong and used in a wide variety of applications.
Generally, the price of steel has been dependent on economic output but other factors that may affect its price include:
- The price and availability of its constituent parts; for instance, iron ore
- Geo-political developments
- Developing technologies
While access to trading commodities is widely available, your success will depend on how well you research the suitability of each commodity to your needs and your talent at monitoring the factors affecting the performance of that commodity.
It is always recommended that you take professional advice from a suitable broker to support your research and knowledge.
WikiJob does not provide tax, investment or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor, and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.