If you want to start trading futures or switch brokers, visit NinjaTrader.
Though most people are familiar with buying physical gold or other precious metals, today’s market offers a variety of options from exchange-traded funds (ETFs) to futures contracts.
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Commodities are basic goods that can be substituted with other equivalent goods of the same variety. These include:
- Precious metals, such as gold and silver
- Energy such as crude oil and natural gas
- Industrial metals such as copper and tin
- Food products including wheat and cattle
Commodity products become so homogenous between suppliers that though there may be slight differences in quality, the products mainly differentiate on price. Most commodities are priced in dollars, which allows some of them to be used as a hedge by investors.
The graph below shows how there is generally an inverse relationship between the U.S. dollar and the gold and oil commodities. Some commodities differentiate based on from where they’re supplied, such as West Texas Crude vs. London Brent Crude. Commodities also play into inflation as they are direct input costs for many industries and uses, such as steel for buildings and gas for cars.
As the cost of commodities rise, consumers spend more money to buy the same amount of the commodity, leaving them with less to purchase other goods and services.
Gold and oil price chart
Gold prices: 100-year historical chart
Steps to Invest in Commodities
Investing in commodities can be done in a few simple steps.
1. Decide on the type of investment.
Investing in commodities can be done through several options:
- Exchange traded funds (ETFs)
- Mutual funds
- Futures contracts
- Physical assets
- The stock of companies heavily tied to that commodity
Each type of investment vehicle has different risk, transaction, margin requirements, and contract parameters. Futures contracts require margin and carry additional risk compared to what you might find in an ETF.
Additionally, futures-based products have what’s known as backwardation and contango, where the current prices may have a discount or premium relative to the expected spot price in the future. This chart depicts how these concepts play out.
Contango and backwardation
2. Determine the size of your investment
Figure out how much money you want to allocate to the investment and then determine how much of the investment you will be purchasing based on the price plus any fees associated with that particular commodity and investment vehicle.
Keep in mind that leveraged products, such as futures or leveraged funds, will move more than a regularly traded index and won’t need as much capital to achieve similar returns. However, because of the borrowing costs of leverage, they will provide lower returns on a comparable basis.
3. Choose the right brokerage
Depending on the type of investment and vehicle you choose you may be required to open a futures or stock account. Most major brokers from Fidelity to Schwab allow for the trading of stocks, ETFs and mutual funds within the same account.
Futures accounts will require additional setup and are not offered by all brokers. When purchasing physical assets there are separate dealers who buy and sell commodities. Need help selecting the best brokerage account for you? Visit Benzinga’s picks for the Best Online Brokerage.
NinjaTrader is a powerful derivatives trading platform specializing in futures, forex and options. The platform has a number of unique trading tools. A free version does exist without the extra goodies provided by Trader + and OrderFlow + but users can still break down charts, backtest strategies and trade without upfront payment. NinjaTrader hosts its own brokerage services but users have their choice of several different brokerage options. Accounts have minimums depending on the securities traded and commissions vary depending on the version of the platform. Advanced derivatives traders will have endless fun with the platform’s mighty array of tools and analyzers.
The free version, which is included with all brokerage accounts is a great starting platform for new traders without the financial commitment. As you grow in your trading and are ready for more tools and functionality, you can add more complexity.
- Futures Traders
- Traders looking for 24/7 action
- Advanced Traders
- Powerful analysis tools
- Free download and simulated trading
- Open source trading apps to enhance experience
- Can only trade derivatives like futures and options
Tradovate is an innovative futures broker offering a tiered pricing structure and a comprehensive proprietary trading platform you can access with additional fees. Tradovate offers a community tab that allows you to connect with other traders and exchange trading ideas. New users can test out Tradovate’s platform with a demo account and free trial, which allows new investors to master the learning curve before opening an account. Though the platform might be too complicated for traders who prefer a simplified experience, it can be a strong choice for more experienced users.
- Experienced and intermediate futures investors
- High-volume traders
- Mobile traders
- Free trading platform packed with unique features
- Community tab allows users to connect with other traders
- Tiered pricing structure
- Easy to use out of the box for experienced futures traders
- Currently only supports futures trading
- Platform can be overwhelming for new traders
Discount trading is a no thrills futures trading broker that offers a multitude of options available to start trading. Low commissions, no inactivity fees, and powerful platforms to start trading.
- High volume / High frequency futures day traders
- Futures investors looking for the lowest futures margins
- Traders needing ultra-low commission rates
- Traders looking for great customer service and fast account opening
- Ultra-low commission rates ($0.49 or less)
- $500 (or less) Day Trading Margin on most markets
- No monthly inactivity fee
- Five different trade routing solutions
- Over 20 of the most popular platforms in the industry
- A completely free trading platform that includes free Level 1 Streaming Futures Quotes ● Support team that answers phone calls quickly
- Tough to find the best platform for your needs, due to the sheer number of options available
- Geared for traders with at least some experience trading the futures markets
Optimus Futures is a leading discount futures broker offering highly customized trading solutions geared towards cost-conscious retail traders with an eye for technology and personal service. Customers gain access to premium tools at no additional cost such as depth-of-market surface, footprint charting, and real-time news alerts along with a fully integrated trading journal.
Users can register a trial version of their software to take a test-drive of the platform, unlocking many of the analysis and charting features including unlimited simulated trades. Traders can also leverage Optimus Futures 3rd party app integration, allowing you to choose the futures trading platform best suited for you.
- Low account minimums, commissions, and margins
- Futures & micro futures traders
- Beginner futures traders
- Unlimited simulated trading
- Low day trading margins
- Highly experienced and competent technical support
- Customizable data fees and order clearing
- Limited to derivatives trading like futures
- The selection of data feeds and clearing firms can be overwhelming for newer traders
4. Purchase the commodity
Once you have the correct account set up with the broker you can transact online, over the phone, or through one of their remote offices. Commodity ETFs, mutual funds, and commodity supplier companies all trade and act like regular stocks.
Futures require a specific exercise date, as well as choosing between various-sized lots. Physical commodity brokers may have different requirements that are different from broker to broker that are similar to purchasing any other physical good.
Final Thoughts on Commodities
Commodities offer a unique way to invest in assets other than stocks. Though prices on commodities can be relatively stable for long periods of time, technological advances like fracking for oil can cause quick changes in the price of a commodity. Additionally, commodities can be influenced by natural events and supply disruptions.