How To Trade Commodities on U.S. Exchanges

The Basics of Investing in Commodities

woman uses tablet to trade in U.S. commodity markets in high-rise building
•••

Oscar Wong/Getty Images

The term "commodity" has meaning to market traders, but at its most basic, commodities make up the things that we eat, drink, and wear in our daily lives, along with the raw materials that make up many other products we use. This is a vast group, and includes such things as oats, cocoa, wool, coffee, cattle, and cotton, as well as the crude oil refined for gasoline, the fertilizer for crops, or copper used for wiring. These are just a few of many.

Changes in political, economic, and even weather issues can affect the prices of commodities. Indeed they rise and fall often. There are many ways to make money on the volatility in commodities markets, but it takes special skill. Also, only a select number of these assets are can be accessed by the public for direct investment.

Here you'll learn more about what commodities are, how they are traded, and the many ways you can invest in this core market.

Key Takeaways

  • There are roughly 30 different commodities traded on U.S. exchanges.
  • The main two exchanges for futures are the CME and ICE.
  • Traders who see the most returns have expert levels of knowledge of any given commodity, as well as knowing where to buy it and where to sell it.
  • You can invest in commodities through physical trading, futures, options, ETFs or ETNs, or stocks.

Major U.S. Commodity Futures Exchanges

These days the two major U.S. futures exchanges are found in the Chicago Mercantile Exchange (CME) Group and the Intercontinental Exchange (ICE).

The CME Group

The CME Group has been around the longest and is the result of a merger between the Chicago Mercantile Exchange and the Chicago Board of Trade. The CME acquired the New York Mercantile Exchange (NYMEX), the New York Commodities Exchange (COMEX), and many other smaller exchanges over recent years. The CME trades grains, livestock, lumber, metals, and energy markets.

The ICE Futures Exchange

The ICE Futures Exchange trades the energy market, soft commodities markets, financial products, and equities, as they own the New York Stock Exchange. The NYBOT lists futures contracts on North American energy, metals, sugar, coffee, cocoa, cotton, and frozen orange juice. ICE has many other interests outside the US.

"Soft" commodities are those that are grown, and they include most agricultural and meat products; whereas "hard" commodities are those that are mined or extracted from the earth, such as coal, gold, rubber, etc.

Commodities Traded on U.S. Exchanges

There are roughly 30 different commodities that are available for trading on the U.S. exchanges. Some, like wheat, have been actively trading for more than 100 years. Others have all but disappeared from exchanges because they could not attract enough trading interest.

The main commodities traded on U.S. exchanges include: Corn, soybeans, wheat, oats, rice, soybean oil, soybean meal, live cattle, feeder cattle, lean hogs, crude oil, heating oil, unleaded gas (RBOB), natural gas, ethanol, gold, silver, platinum, palladium, copper, cocoa, coffee, sugar, milk, cotton, orange juice, and lumber.

There are many other less common and smaller commodities that trade on exchanges with very low volume, as well as many other types of futures.

Commodities Traded in Foreign Countries

There are many other commodities not listed in the U.S. that trade on exchanges around the world. Key exports of a particular country are likely to trade on that nation's exchange, to hedge or lock in the price for future delivery. For instance, the Tokyo Commodity Exchange offers the Azuki (red bean) commodity, which is a common ingredient in Japanese food.

Investing in Commodities

It takes expert knowledge of a commodity, including where to buy it and where to sell it, in order to make it a viable investment. If you want to get involved in commodities trading but lack the background, you can still invest in assets that are built on or relate to this core market. Here are just a few:

Physical Trading

As it sounds, this is buying up the actual goods. Physical trading is not always realistic for the standard investor for a few reasons. First, physical commodities have to be bought in bulk at the wholesale level. Second, they have to be stored. This can mean a lot of space, and sometimes special treatment, like vents or safety measures. Lastly, costs can be very high.

Futures

A futures contract is a promise to buy or sell at a certain price on a future date. If you buy commodities futures, you are in effect making a bet that the value will shift in your favor by the contract date, at which time you must buy or sell. Traders who know the ins and outs of futures can take long and short positions by posting a small amount of futures margin to control a large amount of a commodity.

Options

An option gives you the right (but not an obligation) to sell or buy a commodity on a specific date at an agreed-upon price. They are much like futures in that you can hedge a bet on the value of the underlying commodity at a certain time in the future (whether for or against), but they are less risky since you are only holding a chance to buy or sell.

ETFs and ETNs

Exchange-traded funds (ETFs) can build funds that invest in commodities, and Exchange-traded notes (ETNs) can do the same in the form of debt-driven securities. Both attempt to mirror the price action in commodities, and can be bought and sold like regular stocks. Common commodity-focused ETFs and ETNs include agricultural, energy, precious metal, and industrial metal categories.

Individual Stocks

You could also buy shares in a company that currently mines, harvests, or otherwise produces a commodity. Oil and grain are two common examples. The direct risk isn't simply in the product itself, but also in how well the company performs. The price may or may not line up in a direct manner with the price action in the commodity it represents.

One way to think about the risk that comes with commodities is to look at market sectors, because they make up the building blocks of larger areas of consumer spending. Gold, for instance, is used in tech as well as in luxury retail; oil will affect the energy sector, and so on.

The Bottom Line

Even though in basic terms commodities are tangible and familiar assets, the market that has evolved around their value presents a complex and volatile way to invest. Due to a number of complex factors, they often shift in price and demand. The state of a country's economy or politics can affect prices. Storms or severe weather can wipe out a crop and affect supply. Any given country's import and export laws can help or hamper these markets.

If you decide to invest in the commodities market, make sure you have a good sense of the potential risks and strategies. After doing so, there are many ways you can take part.

The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.