What is a commodity? Trading commodities for beginners – The complete guide

Introduction: Why Study Commodities

Over the past year, the number of people interested in investing in commodities has steadily increased, due to awareness of the importance of diversification in investment portfolios. Before allocating each penny, investors should understand what commodities are, their types, and which trading methods are suitable. This article provides basic knowledge at an expert level about commodities.

Commodities (Commodity) in the Modern Financial Context

Definition and Classification

Commodities in financial terms refer to raw materials or basic products that have universal qualities, can be exchanged, and are used in the production of other goods or services. Examples include copper, crude oil, wheat, coffee beans, silver, and gold.

Commodities can be divided into two main categories:

Hard Commodities – Products obtained from extraction or mining, natural resources that are finite, including crude oil, natural gas, precious metals, and minerals.

Soft Commodities – Products from agriculture and livestock, with limited shelf life. Examples include coffee beans, cocoa beans, oranges, sugar, meat, and other livestock products.

Major Commodity Groups

Investors can classify commodities based on their source as follows:

Agricultural Sector – Raw materials such as sugar, cotton, coffee beans, and other agricultural products.

Livestock Sector – Pork belly, beef cattle, and general livestock.

Energy Sector – Crude oil, natural gas, and other energy products.

Metal Sector – Gold, silver, platinum, palladium, and other precious metals.

Popular Commodities for Trading in Financial Markets

In the global financial markets, the most traded commodities include:

• Gold (XAUUSD) and Silver (XAGUSD) – Precious metals considered as currency hedges.
• Crude Oil Brent (UKOIL) and WTI (USOIL) – Major fuels vital to the global economy.
• Natural Gas (NATGAS) – An energy alternative with increasing demand.
• Coffee (COFFEE) and Sugar (SUGAR) – Highly volatile agricultural commodities.
• Copper (COPPER) – An essential industrial metal.

Factors Affecting Commodity Prices

Demand Factors (

Rising income levels and population growth drive commodity prices, especially in low- and middle-income countries. As income increases, populations tend to buy more food and energy products.

Consumption behavior also plays a key role, such as increased demand for meat, dairy products, and processed foods, which impacts price structures across different commodity categories.

) Supply Factors ###

The supply of commodities depends on production factors like labor, capital, land, natural resources, and technology. Improving efficiency requires investment and research & development.

Since the 2008 crisis, investment in manufacturing sectors in many countries has decreased, leading to supply shortages relative to demand.

( Uncertainties )

Factors such as severe weather events, climate change due to global warming, and geological shifts are uncontrollable but directly impact agriculture and energy sectors.

Feedback Loops and Speculation (

Investments and speculation in futures markets )Futures market### influence price movements. When prices rise, more investors enter to speculate, further pushing prices up. An imbalance between supply and demand is a fundamental driver of this cycle.

Positive and Negative Signals for Trading Commodities

( Advantages of Investing in Commodities )

Inflation Hedge – Gold, silver, and oil are viewed as hedges against inflation. As living costs rise, prices of these assets tend to increase.

Diversification – Commodities have low correlation with other assets like stocks and bonds, helping to reduce overall portfolio volatility.

High Liquidity – Securities and bonds often move inversely, which benefits risk management.

High Returns – During economic uncertainty, commodity prices can rise rapidly due to supply-demand imbalances.

Growth Opportunities – Demand for certain commodities is increasing while resources diminish, potentially raising prices over the long term.

( Disadvantages and Risks of Trading Commodities )

High Leverage – Trading commodities often involves higher leverage than stocks, increasing risk. Excessive leverage can make control difficult and lead to total loss.

High Volatility – Studies show commodities are twice as volatile as stocks and four times more than bonds, especially crude oil and gold. Rapid price changes can lead to poor decision-making.

Inverse Correlation with Stocks – Most of the time, profits from commodities move opposite to stock markets, which must be understood clearly.

Environmental Concerns – In the context of global warming and stricter environmental regulations, livestock, agriculture, mining, and fossil fuel energy sectors face increased legal risks.

How Beginners Can Trade Commodities

Direct investment in commodities is not suitable for everyone, e.g., natural gas or crude oil cannot be stored at home. Therefore, experts have devised alternative methods to allow investors easier access to this market.

Method 1: Commodity ETFs ###Commodity ETFs###

Definition – Commodity ETFs involve buying the commodity for storage without owning the physical asset. Most ETFs invest in derivatives (Derivatives) or futures contracts.

Advantages:

• Low initial investment; one ETF unit costs less than buying a physical gold bar.
• High liquidity; can be traded online during market hours.
• No worries about storage, theft, or additional costs.

( Method 2: Commodity Futures Contracts )Commodity Futures###

Definition – Futures are forward contracts, agreements to buy or sell at a set price today for delivery in the future. Commonly used for gold, oil, silver, and other commodities.

Advantages:

• Multiple profit opportunities from price increases or decreases.
• Low capital requirement; trading futures requires margin (Margin), not full payment.
• Suitable for traders with limited funds.

( Method 3: Stocks of Commodity Companies

Definition – Shares issued by companies involved in producing or exploring/extracting commodities, such as BHP Group Ltd., Rio Tinto Group, Vale SA, Wheaton Precious Metals Corp., and Barrick Gold.

Advantages:

• Risk diversification by adding various assets to the portfolio.
• Acts as a hedge against inflation.
• Lower risk compared to direct trading.

) Method 4: Contracts for Difference ###CFD – Contracts for Difference###

Definition – CFD is online trading via brokers without delivering the actual commodity. Traders hold (Position) that increases or decreases with price changes.

Advantages:

• Profitable in both rising and falling markets; buy to profit from price increases, sell to profit from decreases.
• Leverage allows trading with less capital and potential high returns.
• No rollover needed; unlike futures, just pay overnight interest which is minimal.
• CFD markets operate 24/5, offering trading convenience.

Costs Associated with Trading Commodities

Traders must recognize that actual profit is not just the difference between opening and closing prices but also includes transaction costs.

Spread (Spread) – The difference between bid (Bid) and ask (Ask) prices. For example, if gold bid is 1949.02 and ask is 1949.47, the spread is 0.45 euros. To profit, traders need to have margin exceeding this amount.

Swap – For holding positions overnight, a fee is charged at 23:59, representing the cost of borrowing funds.

Commission – Some instruments charge a fee for opening and closing positions.

Therefore, actual profit calculation = (Closing Price - Opening Price) × Volume - (Spread + Swap + Commission)

Investors should carefully consider these costs to choose the most suitable trading method.

Main Commodity Trading Schedule

Commodity trading hours are not 24/7 but have specific opening and closing times, depending on the region. Traders should check schedules with their brokers.

Here are some main commodity trading times based on Thailand Standard Time:

Gold (XAUUSD): Monday–Friday 06:00–24:00, Saturday 06:00–05:00, Sunday closed.

Crude Oil Brent (UKOIL): Monday–Friday 00:00–24:00, Saturday 08:00–05:00.

Natural Gas (NATGAS): Monday 06:00–24:00, Tuesday–Friday 00:00–24:00, Saturday 06:00–05:00.

Coffee (COFFEE): Monday 16:15–24:00, Tuesday–Friday 00:00–24:00, Saturday closed.

Sugar (SUGAR): Monday 15:30–24:00, Tuesday–Friday 00:00–24:00, Saturday 15:30–01:00.

Strategic Summary

What are commodities? – The complete answer is that commodities are essential raw materials and basic products vital to the global economy, including agriculture, livestock, energy, and metals.

Investing in commodities should not be limited to a single asset class but should be balanced across different assets to reduce overall portfolio risk.

Beginner investors can choose between ETFs, Futures, company stocks, or CFDs based on suitability and risk appetite. However, they must study and understand the risks associated with each method carefully.

Warning: Investing involves risks and may not be suitable for everyone. Study all details thoroughly before making investment decisions.