Top Online Brokers for Commodity Futures Trading

Why Trade Commodities?

Commodity prices and stock market fluctuations are linked by a very complex relationship. In fact, when the stock markets fall, the value of many commodities that are considered risk-free investments rise.

This is especially true for gold, but also for all other precious metals, which generally rise in value when stock market indices fall. Conversely, when stock markets fall, the price of many commodities such as oil falls. This is due to the decline in demand in this sector.

Commodity prices are essentially based on the issue of supply and demand. These two fundamental concepts are, for commodities, influenced by several factors.

• Commodities are indispensable in our daily lives, which strongly influences the demand for this asset class.
• Commodities offer multiple interests in a portfolio:
  1. First, they do not work in the same way as stocks and bonds. Therefore, they can help you diversify your stock portfolio.
  2. Commodities represent an effective protection against the risk of inflation.
  3. Certain precious metals such as gold, silver or palladium are safe havens. When markets are unstable or fall sharply, the price of these metals tends to rise. They therefore play a regulating role in the portfolio.
  4. Finally, some commodities, such as oil, offer considerable profit potential because of their scarcity and their indispensability to the modern economy.

How to trade commodities?

Investors and traders who wish to invest in commodities have several options. They can buy the commodities themselves, futures contracts, shares of the companies that produce them and even ETFs.

Invest directly in commodities

This is certainly the most difficult method and only makes sense in the case of metallic commodities. Indeed, it is not a matter of filling up with fuel at the local gas station to sell it to your neighbors at a few euros more after a few months.

It is rather a question of obtaining ingots of precious metal (gold, platinum, etc.) for example, and then keeping them yourself or by calling on specialized people.

Investing through individual stocks

One way to invest indirectly in commodities is to buy shares in companies that specialize in the production, extraction or processing of commodities.

An increase in the value of raw materials results in an increase in the selling price of the products. When production costs remain the same, profitability increases. However, stock prices are also influenced by various company factors. They are also influenced by major geopolitical and ecological issues.

Investing through ETFs or mutual funds

ETFs are index funds that track their benchmark index. They allow the independent investor to invest in oil, gold, wheat or any other commodity with ease.

UCITS are active management funds, some of which are specialized in commodities. They allow you to invest in this field while entrusting the responsibility of management and choice of securities to a professional specialized in commodities.

Investing through derivatives

Derivatives, where the underlying asset is a specific commodity (e.g. wheat, gold, oil, coffee, etc.) or set of commodities (e.g. grains), offer the opportunity to speculate on the movement of these assets. In particular, it is possible to invest in commodities through CFDs, futures or forwards.

Naturally, these are intended for short-term investments and are only for experienced traders. They know how they work and are careful about the leverage that often accompanies them.

Various markets offer specific futures contracts on agricultural commodities, including the Chicago Board of Trade (CBOT), and the Paris Bourse. Agricultural commodity futures contracts are intended to provide farmers with a hedge when planting. They allow them to protect themselves from future fluctuations in the selling price of the commodity. Traders speculate on the rise or fall in the value of the underlying asset.

Other markets specialize in trading energy-related futures contracts. The New York Mercantile Exchange (also known as Nymex) is a market that specializes in trading energy futures contracts. These contracts include commodities such as crude oil, natural gas and electricity.

Precious metals are also traded on regulated brokers like Plus500. There, you can find various markets for trading precious metals, including the Chicago Board of Trade (CBOT), Nymex and the London Metal Exchange.

The benefits of investing in commodities

• A hedge against inflation: Over time, inflation lowers the real value of a currency. In other words, $10 today may be worth $9 in 5 years. In the USA, inflation recently hit a 40-year high of 9.1% in 2022. The direct consequence of inflation is that prices rise.
• Diversify your portfolio: Like stocks, bonds and real estate, commodities are another asset class that can help diversify investments. This diversification is a kind of prevention against poor performance of asset classes. It can help reduce the overall fluctuation of your portfolio.

Is it worth to trade commodities?

Trading commodities offer investors an effective hedge against inflation, but also an excellent way to diversify their portfolio assets. Like stocks, commodity values are volatile and should be an integral part of a long-term investment strategy.

What is a commodity trading account?

Plus500 is considered one of the best brokers to offer trading accounts that incorporate commodities, such as gold, crude oil, etc. Some of these accounts do not charge commissions, but the trader pays spreads and other costs.

What is the most popular commodity in the world?

Although crude oil comes in many forms, it is the most traded commodity in the world. West Texas Intermediate (WTI) crude oil and Brent crude oil are the two main ones, which are often used as references.