Commodities are raw materials and natural resources that are used in everyday life — from the coffee you drink every morning to the metals used to build your laptop or mobile phone. They play an important role in moving the world’s economy.
Commodities trading can trace its history back thousands of years to when humans started exchanging goods and materials with each other. It could even be said that commodities trading helped shape the modern economic world with the Silk Road routes.
Today, commodities are still being traded across the world. Maybe not in the exact same way when it first began, but the concept of exchanging goods remains.
Defining commodities
Commodities are divided into two broad categories — hard commodities, which are made up of natural resources that are extracted or mined; and soft commodities which are generally agricultural products that are grown.
These two categories are further divided into four groups — metals and energy within hard commodities; agricultural, livestock and meat within soft commodities.
| Hard commodities | Soft commodities | ||
|---|---|---|---|
| Metals | Energy | Agricultural | Livestock and meat |
| Gold | Crude oil | Soy beans | Live cattle |
| Silver | Natural gas | Coffee | Lean hogs |
| Copper | Gasoline | Grains | Milk |
| Platinum | Cotton | ||
* The list above shows only a few examples. In reality, each group is made up of many more individual products.
The value of each commodity depends on several factors, including supply and demand. But because commodities are raw materials, natural events like floods or pandemics can also have a significant impact on the value of a commodity. For example, a flood can affect the production of crops leading to less supply, or a worldwide pandemic affecting the demand for oil as travel becomes restricted.
Popular commodities
One of the most popular commodities to trade is oil. As an essential source of energy, there’s a high global demand for this natural resource resulting in a highly liquid market for crude oil, making it a favourite among traders.
Deriv offers the two most traded types of oil in the market — West Texas International (WTI) which is extracted from the oil fields in the US, and Brent oil which is mined from the North Sea.
Another popular commodity is gold. Gold has been traded throughout history — it’s a popular commodity to invest in and has long been considered a store of value. A store of value is an asset that usually retains its value over time, without being significantly affected by economic or natural disasters. This means that even if the value of other assets fall, traders who have invested in gold don’t need to be too worried.
However, investing in and owning gold isn’t the only way you can take advantage of this precious metal. You can start trading gold by speculating on its price movements — the value of this liquid asset is strongly affected by supply and demand. For example, a worsening economy will often see gold rising in value as demand will rise.
With Deriv, you can trade the price of gold in three ways — against the US dollar (USD), against a basket of five currencies (via the Smart Gold index), and against Bitcoin.
What is commodities trading
Commodities trading today involves the buying and selling of goods, just as it did in its early days. This usually takes place in exchanges, and investors typically trade on commodities through futures contracts, where the buyer and seller agree upon a price for future delivery of the physical asset.
Traders can also trade commodities with CFDs (contracts for difference) and digital options, both of which Deriv offers. These two trade types give you the opportunity to participate in the commodities market without needing to take ownership of the actual physical asset.
With CFDs and digital options, you speculate on the price movements of an asset without needing to buy it. Simply put, you predict whether the price of an asset will rise or fall. If the market moves according to your prediction, you gain a profit. This means that you can possibly gain a profit whether the value of an asset rises or falls.
On Deriv, you can trade commodities on a variety of trading platforms, each with its own unique advantages — Deriv MT5 and Deriv X for CFDs, and DTrader, DBot, and SmartTrader for digital options.
Sign up for a free demo account to start exploring the commodities market. It comes with 10,000 USD virtual currency so you can practise trading commodities risk free.
Disclaimer:
Digital options trading on commodities and the Deriv X platform are not available for clients residing within the EU or the UK.
