Commodities
Commodities are raw materials traded in bulk: energy such as oil and gas, metals such as gold and copper, and farm products such as wheat and coffee. Traders mostly reach them through futures contracts, ETFs or CFDs rather than physical delivery.
Oil, copper, wheat and gold are the raw ingredients of the world economy, and their prices ripple into inflation, company profits and currencies. Commodities trade differently from stocks: a barrel of oil pays no dividend, prices swing with weather, wars and harvests, and most trading happens through futures. This entry explains the main groups of commodities, how people trade them and what moves their prices.
- Category
- Commodities, Energy and Carbon
- Reading time
- 4 min
- Also called
- Commodity, Commodity trading, Raw materials
- Updated
Commodities in plain words
A physical commodity is a tangible raw material — typically a farm product, an energy source or a metal — as opposed to a financial instrument.1
Most trading happens in futures markets, which list contracts on commodities such as gold, oil and wheat alongside financial futures.2
Official price trackers sort commodities into groups — energy, agriculture, fertilizers, base metals and precious metals — and report their prices every month.3
How commodity trading works, step by step
Pick a commodity
Energy, metals or agriculture — each has its own drivers.
Choose the vehicle
Futures, an ETF, a CFD or shares of producers. See Futures Contract and Exchange-Traded Fund.
Check the contract
Size, tick value and expiry differ by market. See Expiration Date.
Watch the curve
Later months can trade above or below spot. See Contango and Backwardation.
Manage the roll
Futures expire, so long positions are rolled forward. See Settlement.
Size for volatility
Commodity prices can gap on supply news. See Position Sizing.
Worked examples
Example 1 — A crude oil futures trade
+$3,000You buy one crude oil futures contract covering 1,000 barrels at $75 and sell at $78.
| Move | $78 − $75 = $3 per barrel |
| Profit | $3 × 1,000 = $3,000 |
Futures contracts are large, so a small price move means a large profit or loss.2 See Crude Oil Benchmarks: WTI and Brent.
Example 2 — A farmer hedges a harvest
Price protectedA farmer expects 10,000 bushels of wheat and sells futures at $6.00. At harvest, wheat is $5.20.
| Lower crop value | 10,000 × −$0.80 = −$8,000 |
| Futures gain | 10,000 × $0.80 = $8,000 |
| Net effect | Price locked near $6.00 |
Producers hedge with futures, while speculators take the other side hoping to profit from price moves.1 See Hedging.
Example 3 — A supply shock
+$600You hold a $5,000 position in a commodity ETF. A supply disruption lifts the commodity 12% in a month.
| Gain | 12% × $5,000 = $600 |
Energy and metal prices can swing sharply with conflicts, inventories and shortages.3
The main commodity groups
| Aspect | Examples | Typical drivers |
|---|---|---|
| Energy | Crude oil, natural gas | Supply cuts, wars, demand. See OPEC |
| Base metals | Copper, aluminium | Industrial demand, China |
| Precious metals | Gold, silver | Rates, dollar, fear. See Precious Metals |
| Agriculture | Wheat, corn, coffee | Weather, harvests |
Why people trade commodities
Hedging
Producers and users lock in prices with futures.
Inflation protection
Raw-material prices often rise with inflation. See Inflation Hedge.
Diversification
Commodities can move differently from stocks and bonds.
Speculation
Traders profit from anticipating price moves.1
Advantages and disadvantages
Advantages
- Direct exposure to the real economy's inputs.
- Can help when inflation is rising.
- Deep, liquid futures markets in major commodities.
- Prices can trend strongly on supply and demand.
Disadvantages
- Very volatile; prices can gap on news.
- No income — a barrel of oil pays no dividend.
- Futures rolling can cost money in contango.
- Large contract sizes and leverage magnify losses.
Going deeper
Read as far as you need. Each level builds on the one before it.
Physical versus futures
Beginner
The physical product is called the cash or spot commodity, as opposed to the futures contract written on it.1 Most traders never take delivery; they close or roll before expiry.
Why ETF returns differ from spot
Intermediate
Most commodity ETFs hold futures and must roll them, so in contango they keep selling cheaper expiring contracts and buying dearer later ones. Over time their return can trail the spot price. See Contango and Backwardation and Commodity Indices.
Reading the commodity cycle
Advanced
Inventories, spare capacity and the shape of the futures curve signal how tight a market is; steep backwardation usually means scarcity now. See Convenience Yield and Inventory-to-Use Ratio.
Common mistakes
Ignoring contract size
One futures contract can control tens of thousands of dollars of goods.
Forgetting expiry
Futures expire; holding into delivery can be costly.
Expecting an ETF to match spot
Roll costs can make it lag.
Trading through supply news blindly
Inventory reports and OPEC decisions can gap prices.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Commodities are raw materials: energy, metals and farm goods.
- Most trading is through futures, not physical delivery.
- Prices react to supply shocks, weather and the economy.
- Futures expire and must be rolled.
- They pay no income and can be very volatile.
Frequently asked questions
Can I buy commodities without futures?
Do I have to take delivery of oil?
Why are commodities so volatile?
Further learning
- Futures Contract
The main way commodities are traded.
- Contango and Backwardation
The shape of the futures curve.
- Crude Oil Benchmarks: WTI and Brent
The world's most traded commodity.
- Hedging
How producers protect prices.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- U.S. Commodity Futures Trading Commission. CFTC Glossary (opens in a new tab) Checked .
- Investor.gov (SEC). Futures Market (glossary) (opens in a new tab) Checked .
- World Bank. Commodity Markets (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.