Why are so many people trading commodities? The Complete Beginner's Guide to Commodity Investing You Must Know

Have you also been flooded with investment topics on your social media feed recently? The word Commodity keeps appearing—ranging from coffee, sugar to gold and crude oil—seems like everything can be traded. But honestly, many people don’t really understand what they are trading, let alone how to make money. Today, let’s talk about what exactly Commodity is and why it’s worth your attention.

What exactly is a Commodity? Plain Language Version

Commodity, translated into Chinese as 商品 or 商品期货, but here it doesn’t refer to the stuff you buy at the supermarket. It refers to those raw materials and primary products that can be used to produce other goods or consumed directly.

Examples include: gold, silver, crude oil, natural gas, coffee beans, sugar, copper, aluminum—these are all commodities. You can think of them as the “blood” of the global economy—without these raw materials, factories can’t operate, and people can’t eat.

Depending on the source, commodities are roughly divided into two categories:

Soft Commodities — from agriculture, such as coffee, sugar, cotton. These have characteristics: short shelf life, easily affected by weather, and their prices fluctuate quite a lot.

Hard Commodities — from mining, such as metals and energy. These can be stored for longer periods but are finite resources—once used up, they’re gone.

What specific types of Commodities are there?

Based on production methods and用途, mainly divided into four major sectors:

Agricultural Products: coffee, sugar, cotton, soybeans, etc. Their prices are very volatile because they depend on weather, pests, and harvests.

Livestock and Meat: pork, beef, mutton, etc. As incomes in developing countries rise, demand for meat increases.

Energy Products: crude oil (including the two main types WTI and Brent), natural gas, etc. The hotter the global economy, the greater the demand.

Metals and Precious Metals: gold (XAUUSD), silver (XAGUSD), copper (COPPER), platinum (XPTUSD), palladium (XPDUSD), etc. These are both industrial raw materials and safe-haven assets.

Among these commodities, gold, coffee, sugar, crude oil, natural gas, and copper are the most actively traded.

What drives the fluctuations in Commodity prices?

To profit from trading commodities, you must understand why prices go up and down. There are four main factors:

1. Changes on the demand side
When the economy is good, factories need more raw materials, and prices go up. As incomes in developing countries increase, consumption of meat and oil rises, pushing prices higher. Conversely, the opposite is also true.

2. Supply constraints
Commodity output is affected by many factors: seasons, weather, mining costs, political risks, etc. If major producing regions experience droughts or political unrest, supply suddenly drops, causing prices to soar.

3. Uncontrollable random events
Global warming causes extreme weather, wars impact energy supplies, pandemics change consumption habits. These black swan events can instantly change price directions.

4. Speculative capital fueling the trend
Investors flock into commodity futures markets, with common phenomena like chasing highs and selling lows. High prices attract more participants, which in turn pushes prices higher, creating a self-reinforcing cycle.

What are the benefits of trading Commodities?

Hedging against inflation risk: Gold, silver, crude oil, and other commodities tend to perform well during inflation periods, protecting your purchasing power.

Diversifying investment risk: Commodity price movements often don’t correlate with stocks and bonds, adding them to your portfolio can reduce overall volatility.

High liquidity: These commodities have large trading volumes, allowing you to enter and exit positions anytime without worries about finding buyers.

High profit potential: During periods of economic uncertainty, commodity prices can surge significantly. Especially when supply is constrained, there’s potential for substantial short-term gains.

Long-term growth prospects: As the global population grows and developing countries industrialize, demand for many commodities continues to increase.

But, you must be aware of these risks

1. Don’t underestimate leverage risks
Commodity trading often involves leverage; the higher the leverage, the greater the risk. Many people have lost everything due to over-leveraging after a wrong decision.

2. Volatility is a double-edged sword
Commodity prices tend to fluctuate twice as much as stocks and four times as much as bonds. This means your account can experience sharp drops in a short period, leading to irrational decisions.

3. Usually move inversely to stocks
Most of the time, when commodities rise, stocks fall, and vice versa. While this can help diversify risk, it also makes it hard to profit from both markets simultaneously.

4. Environmental and regulatory pressures
Industries like oil, mining, and agriculture face increasingly strict environmental regulations. Future supply and costs may change due to these regulations.

How can beginners start trading Commodities?

You don’t need to buy a bag of coffee or a barrel of oil and keep it at home. There are smarter ways:

Method 1: Commodity ETFs

This is the simplest way to get started. An ETF is a basket of assets that usually tracks the price of a specific commodity. The advantages are low minimum investment, easy to buy and sell anytime, and no worries about storage. The downside is that fees can be relatively high.

Method 2: Futures Contracts

A more professional approach. You sign a contract agreeing to buy or sell a commodity at a predetermined price on a future date. Futures have higher leverage and require less margin but are riskier, suitable for experienced traders. Common products include WTI crude oil futures (USOIL-F) and Brent crude oil futures (UKOIL-F).

Method 3: Stocks of Commodity-related Companies

If direct trading seems too complicated, consider buying stocks of companies involved in commodities—like mining companies, oil firms, agricultural firms. This way, you indirectly participate in commodity price movements with lower risk.

Method 4: CFD Contracts

CFD stands for “Contract for Difference.” Simply put, you don’t own the physical commodity but enter into an agreement with a broker to settle the difference in price. Advantages include:

• Two-way trading: you can go long or short without owning the asset
• Leverage: operate large positions with less capital
• 24-hour trading: most markets are open around the clock
• Wide variety: not just commodities, also stocks, indices, etc.

Hidden costs to watch out for when trading Commodities

Many focus only on the spread between buy and sell prices, but there are other costs that can eat into your profits:

Spread: The difference between the bid and ask price. For example, gold’s bid is 1949.02, ask is 1949.47, so you immediately lose 0.45 on the spread. Only when the price moves above this spread do you start making money.

Overnight Fees (Swap): If you hold a position overnight past 23:59, you’ll be charged a swap fee. The amount depends on the traded instrument and position direction.

Commission: Some brokers charge per trade, others don’t. It’s an important factor when choosing a broker.

So, don’t just look at the apparent profit; consider all costs to understand your real profit.

Trading Schedule for Commodities

Not all commodities trade 24/7. Specific trading hours vary by exchange. Here are the typical trading windows (Thailand time):

Summary: Is Commodity worth your attention?

Now you know what Commodity is, how to trade, and what risks to face. The key point: commodities should not be your only investment but part of a diversified portfolio.

Choosing the right broker is crucial—look for one with a wide range of tradable products, fast deposits/withdrawals, and low fees. Most importantly, before risking your hard-earned money, fully understand what you’re trading.

Don’t let the lure of high returns blind you. A prudent investment strategy always beats the dream of getting rich overnight.