Commodities are often divided into two major categories – hard and soft commodities.
Hard commodities include natural resources that must be mined or extracted—such as gold, rubber, and oil, whereas soft commodities are agricultural products or livestock—such as corn, wheat, coffee, sugar, soybeans, chicken, etc.
Commodities markets allow producers and consumers of commodity products to trade in a centralised and liquid marketplace. Additionally, these market participants usually use commodities derivatives to hedge against certain risks.
How to Trade Commodities?
There are several ways to trade in commodities.
1. Commodities Futures
Here you buy and sell contracts in a futures exchange. You enter into an agreement with an investor based on the price that is set for the commodity to be delivered.
2. Spot Trading
This is the method of buying and selling assets at the current market rate – called the spot price – with the intention of taking delivery of the underlying asset immediately. This trading can also be done through CFDs.
3. Commodities stocks
Another option is to buy the stock of a company involved with a commodity. For example: For oil, you could buy the stock of an oil refining company.
Some other options include ETFs, Mutual Funds, ETNs, commodities pools and managed futures.