Exchange traded commodities 101: Getting started with the basics

Exchange-traded commodities (ETCs) are financial instruments that allow traders to gain exposure to commodities such as gold, silver, oil, gas, agricultural products, and more. 

In this article, we will explore what exactly exchange-traded commodities are, the different types available, how they work, and how they compare to other financial assets. 

Let's get into it. 

What are exchange-traded commodities (ETCs)?

Exchange-traded commodities are financial products that track the performance of a particular commodity or a basket of commodities. They aim to replicate the underlying commodity's price movement, letting traders participate in the potential returns or losses without physically owning the commodity.

One of the key features of ETCs is that they provide traders with a convenient way to diversify their portfolios. Instead of trading directly in a single commodity, traders can choose from a wide range of ETCs that cover different commodities and sectors. 

This diversification helps mitigate the risks of trading in a single commodity and provides exposure to multiple markets.

4 different types of exchange-traded commodities

Various exchange-traded commodities are available in the market, each offering exposure to a specific commodity or a group of commodities. Some of the popular types of ETCs include:

1. Metal ETCs: These ETCs track the performance of precious metals such as gold, silver, copper, and palladium. They are often considered a hedge against inflation and a haven asset during economic uncertainty.
2. Energy ETCs: Energy ETCs focus on trading oil, natural gas, and other energy-related products. These ETCs let traders participate in the price movements of the energy markets, which are influenced by supply and demand dynamics, geopolitical events, and environmental policies.
3. Agricultural ETCs: These ETCs provide exposure to commodities like wheat, corn, soybeans, coffee, and sugar. You may consider its price determinants, such as weather conditions, global demand, and supply chain disruptions when trading it on contract for difference (CFD) platforms. 
4. Broad commodity ETCs: These ETCs offer exposure to a diversified basket of commodities across different sectors. It combines metal, energy, and agricultural commodities into one financial asset. Broad commodity ETCs provide a comprehensive and balanced approach to commodity trading.

How do exchange-traded commodities work?

Exchange-traded commodities work by tracking the price movements of the underlying commodity or commodities they represent. 

The commodity it follows determines the value of an ETC. When the price of the commodity rises, the value of the ETC increases, and vice versa.

The tracking mechanism of ETCs happens through various methods, such as physical replication, synthetic replication, or a combination of both. 

Physical replication involves holding the actual physical commodity or a portfolio of commodities that closely imitate the performance of the target commodity. Synthetic replication, on the other hand, uses derivative instruments like futures contracts to copy the price movements of the underlying commodity.

ETCs typically have lower expense ratios than other financial assets, making them an attractive choice for cost-conscious traders.

Like trading stocks, you can buy and sell ETCs on financial markets or over-the-counter markets such as CFD platforms throughout the trading day. 

If you are looking for a user-friendly trading platform to invest in financial instruments, you may want to consider markets.com. With over 1,000 financial instruments to choose from, this platform offers investors a wide range of trading options. The platform also provides instant trade execution, making monitoring and managing your investments in real-time easier. 

Comparison of exchange-traded commodities with other financial assets

When considering trading in exchange-traded commodities, it is important to understand how they compare to other assets. 

Let's take a look at some of the key differences between ETCs and other popular financial securities:

• Physical commodities: These require storage, transportation, and handling, which can be costly and impractical for individual traders. ETCs deliver a convenient alternative by letting traders gain exposure to commodities without the need for physical ownership.
• Futures contracts: ETCs differ from futures contracts as they do not have an expiration date. Futures contracts require traders to roll over their positions periodically, which can be complex and costly. ETCs, on the other hand, provide continuous exposure to the underlying commodity without the need for contract expiration management.
• Stocks and bonds: ETCs offer you an opportunity to diversify your portfolios beyond traditional stocks and bonds. Commodities have historically exhibited low correlation with other asset classes, making them an effective tool for portfolio diversification.
• Mutual funds: ETCs have advantages over mutual funds in cost and liquidity. ETCs generally have lower expense ratios than mutual funds, and they can be bought and sold throughout the trading day at market prices. Mutual funds, on the other hand, are priced once a day at the net asset value (NAV).

5 steps to trade in exchange-traded commodities

Here are the steps you can follow to get started trading various exchange-traded commodities:

1. Research and select an ETC: A thorough research on the available ETCs and choosing the one that aligns with your financial goals and risk tolerance must be done. It would help if you also considered factors such as the commodity or commodities it tracks, the tracking method, expense ratio, and historical performance.
2. Open a brokerage account: You must open a brokerage account with a reputable broker that offers access to your desired ETCs. Ensure the broker provides a user-friendly trading platform, competitive commission rates, and reliable customer support.
3. Fund your account: You may fund your account at a brokerage such as markets.com to kickstart trading in commodities. However, if you need more confidence and practice before trading, you can start a demo account to hone your skills and to navigate the platform easily. 
4. Place your trade: Once your account has capital or you have used a demo account, use the brokerage's trading platform to place your trade. You may now enter the ticker symbol of the chosen ETCs or commodities, specify the number of units you wish to purchase, and set the desired order type (e.g., market order, limit order).
5. Monitor and manage your assets: You must regularly monitor the performance of your ETC and make necessary adjustments based on market conditions and your financial objectives. You can set stop-loss orders to protect your assets against significant losses.

Access expert resources on exchange-traded commodities at markets.com

In conclusion, exchange-traded commodities open entries to financial opportunities that grant access to diverse commodities without the hassle of physical ownership. 

With the fundamental principles of exchange-traded commodities, knowledge of its various types, and a keen understanding of how to trade them, you can make wise decisions that could harness the potential of the ever-moving commodity markets.

Go forth with confidence trading at markets.com. Our platform offers more than 20 commodities for trading and 70 exchange-traded funds (ETFs) that you can add to your portfolio.

You don't have to worry about trading these assets, as markets.com has a trader's clinic podcast and learning resources you can use to help get you started on your trading journey.

Join markets.com today and start trading in exchange-traded commodities.  

 

When considering "ETFs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.