What are commodities and how does it work?

This post was originally published by Deriv on 11 November 2021

Commodities are raw materials and natural resources used to create the products we use every day. Commodities play an important role in our daily lives, from the coffee we drink in the morning to the metals used to build our devices.

Commodities trading has been around for centuries. The Silk Road was one of the most important trade networks in history and played a major role in commodities trading. While the Silk Road is no longer active, commodities trading is still a major part of the global economy. The underlying principle of supply and demand has existed for centuries, driving the commodities market today.  

Types of commodities

There are two main types of commodities: hard commodities and soft commodities. 

• Hard commodities are natural resources that are extracted or mined. Examples of hard commodities include oil, gold, and copper.
• Soft commodities are agricultural products that are grown. Examples of soft commodities include wheat, corn, and coffee.

To break it down further, there are two types of hard commodities (metals and energy), and soft commodities are divided into agricultural goods and livestock and meat.

The value of each asset in commodities trading depends on several factors, including supply and demand. Plus, because commodities are raw materials, natural events, like floods or pandemics, can also affect their value — a flood can impact crop production, causing a decrease in supply, and similarly, a global pandemic can affect oil demand due to travel restrictions. 

Popular commodities 

One of the most popular commodities to trade is oil. As an essential source of natural energy with high global demand, the crude oil market is highly liquid, making it a favourite among traders. 

Deriv offers the two most traded types of oil in the market: West Texas International (WTI) from the oil fields in the US and Brent oil from the North Sea. 

Another popular commodity is gold. Throughout history, people have traded gold. It’s a popular asset to invest in, and people have long considered it a store of value. A store of value is an asset that keeps its value over time despite economic or natural disasters. This means that even if the value of other assets falls, traders who have invested in gold don’t need to be too worried. 

However, investing in and owning gold isn’t the only way to take advantage of this precious metal. You can start trading gold on Deriv by speculating on its price movements. The value of this liquid asset is strongly affected by supply and demand. For example, a worsening economy will often see gold's value rise as demand rises. 

You can trade the price of gold on a commodity trading platform like Deriv in three ways. Against the US dollar (USD), a basket of five currencies (via the Smart Gold index), and Bitcoin. 

What is commodities trading?

Commodities trading today involves the buying and selling of goods, just as it did in its early days. This usually takes place in exchanges, and investors typically trade on commodities through futures contracts, where the buyer and seller agree upon a price for the future delivery of the physical asset. 

However, traders can also trade commodities without needing to buy or sell the actual physical goods. This can be done by trading CFDs (contracts for difference) and digital options, both of which Deriv offers. These two trade types give you the opportunity to participate in the commodities market without needing to own the commodity asset you are trading. 

When you trade CFDs or digital options, you speculate on the price movements of an asset. Simply put, you predict whether the price of an asset will rise or fall. If the market moves according to your prediction, you gain a profit. This means that you can possibly gain a profit whether the value of an asset rises or falls, as long as your prediction is correct!

On Deriv, you can trade commodities on a variety of trading platforms, each with its own unique advantages — Deriv MT5 and Deriv X for CFDs, and Deriv Trader, Deriv Bot, and SmartTrader for digital options. 

Sign up for a free demo account to start exploring the commodities market. It comes with 10,000 USD virtual currency, so you can practise trading commodities online risk-free.