How to Trade Commodities

How to Trade Commodities

Do you know how to trade commodities, then you need to know how to buy and sell futures. The stock market isn’t only about tech stocks, bonds and ETFs. One of the major components of global trade is commodities. Without these essential materials, there would be food shortages and we would have a hard time going from point A to B. In today’s economy, we can see the consequences of shortages.

Chart by TradingView.

What Are Commodities?

To begin with, what are commodities? They are essential raw materials used to produce the products you see on store shelves.

Oil prices are increasing daily due to international tensions. The prices of many other essential goods are also on the rise.

Some of them have even been out of stock for some time now. This impacts the price of their raw components on global markets. Despite economical uncertainty, smart investors can profit from these chaotic times in various ways.

This implies more risk and knowledge necessary to successfully complete these trades. In today’s article, we will explore various investing ways and strategies used in the commodities market.

Commodities are separated into 4 distinct categories.

Agricultural Products

Do you know how to trade commodities using agriculture? This category includes edible and non-edible goods.

Popular examples are cocoa, coffee, cotton, grain, soybeans, sugar, wheat and various oils. 

During periods of uncertainty, prices and supply can be very volatile. Externalities include weather and wars.

An excellent example is the current war in Ukraine. Ukraine is a major corn supplier, which is necessary to produce various everyday goods.

How to Trade Commodities: Energy

The energy market includes many important players. They are in charge of producing coal, ethanol, natural gas, oil, uranium and other forms of energy. This category also includes renewable energies such as electric, solar, water and wind power. 

International organizations are in charge of determining the supply of many resources. One of the most important examples is the Organization of the Petroleum Exporting Countries (OPEC). They are often in disagreement and prices become very volatile. Today, oil prices are almost at an all-time high.

Russia is partly to blame for this as it is a major producer and is at war with most of the world. Countries around the world are also to blame as they are highly dependent on oil to fuel transportation, heating and basic life.

How to Trade Commodities: Livestock

Any live animals that produce meat and derivatives can be traded in the commodities market. Cattle, hogs and pork are good examples.


Industrial and precious metals are both part of this final category. There isn’t a shortage of good examples here: gold, palladium, platinum, silver, aluminum, iron, copper and zinc. 

Gold is an excellent hedge against the dollar as well as an excellent historic investment during a recession. 

Now that we know what commodities are, let’s take a look at the various ways of investing in them.

How to Trade Commodities Using Futures

The first and most common way to trade commodities is in the futures market. The futures market is based on the price speculation of various underlying assets mentioned in the previous section.

In its early days in the 19th century, everything was done in person. It took time for the information to travel around the country and the world. Today, buyers and sellers meet on an online platform to buy and sell products for a predetermined price and date.

It’s common to sell the contract before expiration for a profit. Others decide to secure their purchases. Transportation companies that require large quantities of oil are a good example. For metals, many investors choose to hold on to their physical investment.

The majority of futures transactions are performed on the Chicago Board of Trade (CBOE). It began with farmers and evolved to investors trading barrels of oil in their basements.

A How To

Until 1997, institutional investors had almost an exclusive grip on commodity futures. When E-mini futures were released, it opened the doors to everyday investors. Contracts were much cheaper and the quantity was slashed. After a few years, E-mini futures were adopted by the majority of investors.

The first step to begin trading commodities on the futures market is to open a margin brokerage account with a broker. We have a list of recommendations. Not every broker is similar, it’s important to make the appropriate choice before embarking on the journey. 

Commodity Stocks

Next on the list are commodity stocks. Many public companies mine, produce and distribute different commodities. They are available on major stock exchanges. Let’s explore a few stocks for each of the 4 commodities categories.

Agricultural Stocks

The agricultural sector is very diverse. Some companies produce a variety of foods, others provide the fertilizers necessary for the growth of these foods. Finally, some companies sell the equipment necessary for this entire business to run smoothly and efficiently.

Some interesting plays in the sector include Archer Daniels Midland (NYSE: ADM), Bayer (OTC: BAYR.Y), Scotts Miracle-Gro (NYSE: SMG) and Deere & Co (NYSE: DE).

Energy Stocks

Oil stocks are a good example of energy stocks. They have been performing well this year due to shortages and transportation issues.

Top picks in this category are ConocoPhillips (NYSE: COP), Devon Energy (NYSE: DVN), Enbridge (NSYE: ENB), ExxonMobil (NYSE: XOM) and Phillips 66 (NYSE: PSX). Many of these companies have operations around the world and are beginning to diversify more seriously into renewables.

Livestock Stocks

Across many countries, a significant portion of the land is occupied by livestock. In the last few years, many companies that sell plant-based meat have emerged.

I will include them in this section. Some of the most important companies in the industry are Tyson Foods (NYSE: TSN), Hormel Foods (NYSE: HRL), Beyond Meat (NASDAQ: BYND) and Oatly (NASDAQ: OTLY)

Metals Stocks

The last commodity sector is one of the most diverse and saturated. Many companies compete to obtain drill rights and to find the best mines to exploit. Some companies specialize in a single metal, while others have a diversified portfolio.

Some good investment opportunities include the following: Rio Tinto (NYSEL RIO), Nucor (NYSE: NUE), Barrick Gold (NYSE: GOLD), Steel Dynamics Inc (NASDAQ: STLD), Wheaton Precious Metals Corp (NYSE: WPM) and finally Freeport-McMoRan Inc (NYSE: FCX)

How to Trade Commodities Using ETFs

Last on the list are commodity ETFs. Fund managers combine companies of all sizes into a single fund. Investors effectively have access to value and growth stocks in the same sector.

Some funds have a variety of commodities in their portfolio. Others are limited to a single type of commodity.

Let’s take a look at some of the most important commodity ETFs on the market. For a more extensive list, this website can be useful.

SPDR Gold Trust (NYSEARCA: GLD): Once upon a time, this was the second-largest ETF in the world. Now, it sits outside the top 10. You guessed it, its holdings consist of …gold.

How to Trade Commodities Using ETFs

Last on the list are commodity ETFs. Fund managers combine companies of all sizes into a single fund. Investors effectively have access to value and growth stocks in the same sector.-

Some funds have a variety of commodities in their portfolio. Others are limited to a single type of commodity.

Let’s take a look at some of the most important commodity ETFs on the market. For a more extensive list, this website can be useful.

SPDR Gold Trust (NYSEARCA: GLD): Once upon a time, this was the second-largest ETF in the world. Now, it sits outside the top 10. You guessed it, its holdings consist of …gold.

iShares Silver Trust  (NYSEARCA: SLV)

Invesco Optimum Yld Dvsfd Cmd Str No K-1 ETF (NASDAQ: PDBC): One of the most diversified commodities ETF, Its top holdings include gasoline, zinc, crude, natural gas, gold, corn etc. None of the commodities represent more than 4% of the value of the entire portfolio. Invesco’s ETF covers them all.

First Trust Global Tactical Commodity Strategy Fund (NASDAQ: FTGC): First Trust also offers a well-diversified fund. At the time of writing this article, its top holdings include futures that expire in November 2022. Gold, soybeans, aluminum and cotton are the top holdings. There is slightly more weight attributed to these 4 commodities. If we compare it to Invesco’s, it has performed much better recently. 

United States Oil ETF (NYSEARCA: USO): The final ETF on our list tracks Light Sweet Crude Oil from West Texas. It is up over 60% YTD. How much longer can it rise? Will it reach 2008 levels?

Now You Know How to Trade Commodities

To conclude, there are many ways investors can trade commodities. The most popular one is used by institutional and everyday investors, futures. Those who do not wish to trade on margin can simply buy stocks or ETFs for the desired sector or specific product.

There isn’t a shortage of ways to invest in commodities. Commodity prices tend to be volatile. Their prices are often influenced by external factors. Today’s economy is a perfect representation of this.

The prices of many of them have risen to near-record highs due to shortages and wars around the globe. Smart investors can easily benefit from this, while inexperienced investors might suffer great losses if they don’t come prepared.

If you want to learn more about how you can profit from the stock market, head on over to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.


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