Commodity is a basic good that drives the financial world - A knowledge hub for beginners

In today’s era, as investing becomes an important option for wealth accumulation, many people are looking for new investment channels that go beyond stocks and bonds. Among these options, commodities are gaining significant attention because they provide access to the basic goods market, which plays a vital role in the global economy.

This article will guide you through everything you need to know about trading commodities, especially for beginners—covering basic definitions, types, factors affecting prices, and suitable trading methods for different investors.

Fully Understand Commodities - What Every Beginner Trader Must Know

If we define commodity simply, it is raw materials or basic products used to produce goods or services in daily life. These goods are not manufactured based on brand preferences but are derived from farming, livestock, or natural extraction.

Examples close to us include copper, crude oil, wheat, coffee, gold, silver, and various livestock. What makes commodities different from other products is their standardization—meaning one ounce of gold from any source has the same value and can be easily exchanged.

Categorizing Commodities and Risk Diversification

Commodity traders typically divide goods into two main groups, each with different price behaviors and risk levels:

Soft Commodities include products from agriculture and livestock, such as coffee beans, cocoa, oranges, sugar, and meats. These have limited shelf life and are highly volatile due to weather and natural factors beyond control.

Hard Commodities consist of products mined or extracted from nature, such as crude oil, natural gas, copper, silver, gold, and platinum. These are finite resources; once used, they are gone. Humans cannot produce them artificially.

Additionally, commodities can be categorized by sector: agriculture, livestock, energy, and metals. Each sector has representative assets actively traded in financial markets, such as coffee (COFFEE) and sugar (SUGAR) from agriculture, Brent crude oil (UKOIL) and natural gas (NATGAS) from energy, and gold (XAUUSD), copper (COPPER), platinum (XPTUSD) from metals.

What Causes Commodity Prices to Fluctuate? - Key Factors to Watch

Understanding why commodity prices fluctuate is crucial for predicting market directions. The main factors include:

Demand Factors: relate to population size, income levels, and consumption habits. In high-income countries, consumers buy more meats and animal products rather than grains, meaning income growth can drive commodity prices in different directions.

Supply Factors: depend on production inputs like labor, capital, land, water, and technology. Investments in R&D improve production efficiency. However, after the 2008 crisis, investments in infrastructure decreased.

Uncertainty: such as weather conditions, natural disasters, and climate change directly impact yields and cause price swings.

Feedback Loops: occur from futures market investments and speculation. When prices rise, more investors are attracted, pushing prices even higher. Imbalances between supply and demand are primary drivers of volatility.

5 Ways to Trade Commodities for Beginners - Which Method Suits You?

For those interested in trading commodities without owning the physical goods (since, for example, you can’t store crude oil at home), there are four main options:

Method 1: Commodity ETFs

Commodity ETFs are indirect investments in underlying assets. Investors do not own the physical commodities but hold units of the fund, which mainly invests in derivatives or futures contracts to track commodity prices.

Advantages:

• Lower capital requirement—buy 1 ETF unit instead of full physical gold.
• High liquidity—can be traded online anytime during market hours.
• No need to worry about storage or additional costs.

Method 2: Futures Contracts

Futures are agreements to buy or sell a commodity at a predetermined price on a future date. They are commonly used for gold, oil, silver, and foreign currencies.

Advantages:

• Profit from both rising and falling markets.
• Require less capital—use margin to leverage.
• Suitable for traders seeking leverage.

Method 3: Stocks of Commodity Companies

Instead of buying commodities directly, invest in shares of companies involved in production or mining, such as BHP Group Ltd., Rio Tinto, Vale SA, and Barrick. These large firms are actively traded on stock exchanges.

Advantages:

• Diversify risk across multiple companies.
• Hedge against inflation, as commodity companies often profit more when inflation rises.

Method 4: CFDs (Contracts for Difference)

CFDs are online derivatives contracts with brokers. Traders do not own the physical commodity but hold a contract whose value changes with the underlying price.

Advantages:

• Profit from both upward and downward price movements.
• No rollover needed—can hold positions across months or years with minimal overnight fees.
• 24/5 trading hours—can trade anytime during weekdays.
• Access to various commodities, stocks, and indices.

Method 5: Direct Ownership of Commodities

Some choose to buy physical gold bars or coins to store value. While this method offers tangible assets, it usually yields lower returns due to storage and insurance costs.

What is CFD? Why Do Traders Prefer This Method for Commodities?

If you’re a beginner wanting simple commodity trading, CFD trading might be the best choice. It suits small traders because:

CFD allows you to:

• Use leverage—trade larger positions with less capital, increasing profit potential but also risk.
• Profit in both rising and falling markets—simply by choosing the correct position.
• Trade 24/5—no need to wait for market open.

However, high leverage also means high risk; traders can lose their entire invested capital if not careful.

Pros and Cons of Trading Commodities - What You Need to Know

Advantages

1. Hedge Against Inflation:
Assets like gold, silver, and oil are seen as inflation hedges. Rising prices help preserve your wealth’s value.

2. Portfolio Diversification:
Commodities often have low correlation with stocks and bonds, reducing overall portfolio risk.

3. High Liquidity:
Commodity prices tend to move inversely to equities, providing stability and opportunities.

4. High Return Potential:
During economic uncertainty, supply-demand imbalances can rapidly drive prices higher.

Disadvantages

1. High Leverage:
Trading commodities often involves higher leverage than stocks, increasing both gains and losses.

2. Greater Volatility:
Commodities are 2-4 times more volatile than stocks, which can be stressful for some traders.

3. Opposite Market Trends:
When stock markets fall, commodity prices often rise, which can be advantageous or disadvantageous depending on your position.

4. Environmental Impact:
Investing in certain commodities like agriculture, livestock, and oil can have negative environmental effects, especially amid growing climate concerns.

Calculating Costs Accurately - Don’t Let Fees Eat Into Your Profits

Many overlook the importance of cost calculation. Your actual profit isn’t just the difference between entry and exit prices; you must subtract various costs.

Three main cost types:

1. Spread:
Difference between bid and ask prices. For example, if gold’s bid is 1,949.02 and ask is 1,949.47, the spread is 0.45. To profit, price must move beyond this spread.

2. Swap (Overnight Fees):
Holding a position overnight incurs a fee based on a percentage of the position size, calculated at 23:59.

3. Commission:
Some brokers charge a fee for opening and closing trades.

Correct profit formula:
Profit/Loss = (Close Price - Open Price) × Quantity - Spread - Swap - Commission

For beginners, try a free demo account with Mitrade—trade with virtual $50,000 without risk. New customers also get bonuses and zero commission.

Commodity Trading Hours - When Is the Best Time to Trade?

Commodity markets are not open 24 hours. Trading hours vary by asset class.

For major assets offered by Mitrade (Thailand time):

Peak trading hours are usually during North American daytime, when spreads are narrower and liquidity is higher.

Summary: Commodities Are Investment Opportunities You Should Not Overlook

Commodities are fundamental goods with a crucial role in the global economy and personal investment portfolios. While trading commodities involves high risk, it also offers the potential for substantial returns—especially when you understand the market dynamics.

The key is choosing the right trading method suited to your financial situation and risk appetite. Whether via ETFs, futures, CFDs, or stocks of commodity companies, always remember that commodities should be part of a diversified portfolio, not the entire one.

Continue learning, practice with demo accounts, and manage risks wisely—then you’ll be ready to step into the world of commodity trading.