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Commodity trading overview

Commodity trading overview

The global commodity market is full of opportunities. Nowadays, people can invest in commodities such as gold, oil or coffee online through CFD trading and can take advantage of any price movement – up or down. In this article we will give you a short introduction to commodity CFD trading and explain how you can take advantage of this market, even if you only have a relatively small sum to invest.

What is commodity trading?

In simple terms, the commodity market is a financial market that deals with raw materials (also known as a primary economic sector). Investors can access around 50 major commodity markets, commonly divided into soft commodities (such as coffee or cocoa) and hard commodities (such as oil or gold).

A bit confused? Take a look at this short, informative video

How and where are commodities traded?

How and where are commodities traded?

In the past, if you wanted to benefit from the price change of a specific commodity, you had to physically buy it. For example, if you wanted to invest in crude oil, you would have had to buy barrels and store them. If you wanted to buy gold, you would have had to buy bullions and put them in a safe deposit. Nowadays though, you can invest in the price of different commodities in the form of CFDs. What are CFDs? We’re getting there…

Commodity CFD trading

When you trade different commodities in the form of CFDs (Contract For Difference), you invest in the price of a specific commodity without having to actually own it. Commodity CFD trading can be done online, from any standard computer or smartphone.
Still unsure? Find out more about CFD trading.

Leveraged commodity trading

At iFOREX, you have the opportunity to trade commodity CFDs with leverage – a unique tool that enables you to boost your trading power. What do we mean? For example, the maximum leverage on gold is 400:1. So, with a $200 investment, you can open a deal on gold worth up to $80,000. For every dollar you invest, we give you $400 in trading power.

Here’s a visual example:

Leveraged commodity trading

Remember:
Leverage changes from one instrument to another. When you trade gold CFDs, the maximum leverage is 400:1. When you invest in crude oil CFDs, the maximum leverage is 200:1.

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Is there a difference between commodity trading and other tradable instruments?

Is there a difference between commodity trading and other tradable instruments?

At iFOREX, you can invest in a variety of CFD products including currencies, shares and indices. Is there a difference between trading commodities online and trading other CFD instruments? Not really. In both cases you invest in the price of a specific product and you can choose to invest whether you think the price will go down (‘short’ trading) or up (‘long’ trading).

The only real difference is in the measurement of a single unit (‘contract’). When you invest in share CFDs for example, a contract is the price of 1 share. When you invest in commodities though, a single contract is 1 barrel of oil / 1 ounce of gold, etc. Feeling a bit confused? Here’s a quick example.

How to open your first commodity CFD deal

Here’s a quick example of a commodity CFD deal. At iFOREX, you can open a deal in just three simple steps.

  1. Choose a commodity
    In this example, let’s say you want to invest in crude oil CFDs. If the price of a single oil barrel is $50, one CFD on Oil will also be worth $50.
     
  2. Choose your deal size
    As shown above, leverage allows you to buy up to 200 times more oil with your investment. For example: With a $200 investment, you can buy $40,000 worth of oil CFDs, using 200:1 leverage, which in our example means 800 contracts.
     
  3. Choose Direction
    When you trade CFDs, you can invest whether you believe the price will fall or rise. If you believe prices will fall, choose a ‘sell’ deal, if you think they’ll rise, choose a ‘buy’ deal. In our example, let’s go with Buy. Now what?
     
  4. Close your crude oil deal and collect your profit
    Let’s say the price of oil rose by $2, from $50 to $52 and you decide to close your ‘Buy’ deal.

    Close your crude oil deal and collect your profit

    What’s your profit?
    If you were going to say $2, that’s not quite right because remember: You bought 800 contracts. This means your actual profit from this potential deal is $1,600. Not bad, right?

What kind of commodity CFDs can you trade?

As we mentioned above, the world is full of commodities that people can trade and at iFOREX you can invest in 18 popular commodities in the form of CFDs. As we mentioned earlier, commodity markets are commonly divided into two main categories: Soft and hard commodities, but that’s not the only division. Here are three popular and well-known categories of commodities.

Agricultural commodity trading

It shouldn’t be too hard to guess what kind of commodities fall under this category. Sugar, coffee, cocoa, corn, cotton, soy and wheat are just some examples. It’s tempting to assume that agricultural markets are relatively small, but in fact, coffee, for example, is the second largest commodity market in the world – second only to oil.
What affects the price of agricultural commodities?
The most obvious factors that impact the price of agricultural commodities are supply and demand, but there are many other factors involved.

For example:
Weather | Trade agreements | Development of new technologies | Political crises | Shipping costs | Taxation | Health regulations | Change in consumers’ preferences

Since many commodities are used for human or animal consumption, there are many regulatory bodies that can impact how a specific commodity is produced or stored. Additionally, specific government policies can also play a role in the commodity market. For example: Britain’s decision to impose a ‘sugar tax’ on sugary beverages can impact the use of sugar by beverage companies and could ultimately, especially if it spreads to other countries, impact the price of sugar.

Energy commodity trading

Members of this extremely popular category include ones we all know well, and probably use daily: WTI crude oil, heating oil, Brent oil, gasoline and many others. Because many of these commodities are an integral part of numerous industries and economies, they have the power to move the market. For example, a drop in oil price can potentially affect aviation companies, tire companies, SUVs, electrical vehicles and even economies of countries like Russia or Saudi Arabia that heavily rely on oil revenue. What affects the price of energy commodities? You can already guess two factors: Supply and demand, but as usual, other factors are involved.

Here are some examples:
OPEC meetings | Political statements | International agreements | Political crises | Taxation | Industrial changes | Changes in large economies such as China

One of the most influential bodies that impact the oil market is OPEC (Organization of the Petroleum Exporting Countries) which includes some of the world’s largest oil exporters. OPEC meetings can result in critical decisions for the global oil market and are hence carefully monitored by oil investors.

Metals commodity trading

This category includes the commonly known precious metals: Silver, gold, platinum and palladium. In the past you had to be rich to get involved in precious metal trading, but thanks to CFD trading, you can invest in their price anywhere and anytime, and maximize your investment potential using leverage.
Which factors affect the price of gold?
Again: Supply and demand and once again.

Here are a few others…
Economic changes in China and India (the world’s largest consumers) | Change in taxation | Usage in technology | Market insecurity | Market calmness | Change in consumers’ preferences | Federal Reserves’ decisions regarding interest rates
Gold and the global economy
Gold and the global economy

Gold was historically viewed by some investors as a safe-haven asset. In times of economic instability, some investors turned to it, preferring it over so-called ‘riskier’ investments such as shares.

For the full list of commodity CFDs you can trade at iFOREX, visit our trading conditions page.

Since many factors affect the price of commodities, it is important for investors to follow major economic events and market news. At iFOREX, we provide you with an updated Economic Calendar for your convenience, which you can access at any time.

The key elements of CFD commodity trading at iFOREX
  • No need to buy – or store – the commodities you invest in
  • A wide variety of commodities to choose from
  • Leveraged trading enables you to maximize your trading power
  • Trade anytime, anywhere using advanced trading platforms
  • Access free information resources such as news and daily market analysis
Want to learn more about commodity trading?

Join iFOREX to benefit from our exclusive education package and start taking advantage of market opportunities.

Our Education Package includes:

  • 1-on-1 training with a trading coach

    1-on-1 training with a trading coach

  • A FREE PDF guide for beginners

    A FREE PDF guide for beginners

  • A $5,000 demo account for training

    A $5,000 demo account for training