What are commodities in trading?

A commodity is a raw material or basic product that can be bought and sold in financial markets. Common examples include crude oil, gold, silver, wheat, coffee, sugar, corn and cotton.

Unlike branded or manufactured products, commodities are standardised. This means buyers and sellers trade products of the same quality or grade rather than choosing between different brands. For example, traders are interested in the price of a barrel of crude oil or an ounce of gold, not who produced it.

Because commodities are used throughout the global economy, their prices are heavily influenced by supply and demand. Weather conditions, geopolitical events, economic growth and changes in production can all affect commodity prices, making them an important part of global financial markets.

Why commodities are interchangeable

One of the defining characteristics of a commodity is that it is interchangeable with another commodity of the same type and quality. This concept, known as fungibility, means that one standard unit can be exchanged for another without affecting its value. For example, one ounce of gold that meets the required market standard is considered equivalent to any other ounce of the same grade.

This is possible because commodity markets rely on agreed standards for quality, quantity and delivery. Standardisation gives buyers and sellers confidence that they are trading the same product, regardless of where it was produced. It also helps commodity markets trade efficiently by allowing large volumes of goods to be bought and sold without negotiating the details of every individual transaction.

This is one of the key differences between commodities and finished products. While commodities are valued according to agreed specifications, finished products vary by brand, design, features and reputation, making them less easily interchangeable.

Common examples: hard and soft commodities

Commodities are often grouped into hard and soft commodities based on how they are produced. Hard commodities are mined, extracted or refined from natural resources, while soft commodities are grown or raised through agriculture and livestock farming.

Hard commodities include products such as crude oil, natural gas, coal, gold, silver, copper and aluminium. Soft commodities include wheat, coffee, sugar, rice, corn and cotton. Because they are produced in different ways, each group is influenced by different supply and demand factors. 

Commodities can also be grouped into four broad categories: energy, metals, agriculture and livestock. Each category responds to different market conditions. For example, energy prices can be affected by production levels, refining capacity and geopolitical events, while metal prices are often influenced by mining activity, industrial demand and wider economic conditions. Agricultural and livestock commodities are more closely linked to weather, seasonal production, feed costs and disease outbreaks. 

These differences help explain why commodity prices do not all move for the same reasons. A drought may reduce coffee harvests within a single growing season, while a shortage of copper can take years to resolve because developing new mines requires significant investment, regulatory approvals and construction.

Energy commodities

Energy commodities include crude oil, natural gas, gasoline and coal, all of which play a central role in powering homes, businesses, transport and industry. Their prices are influenced by factors such as production levels, refining capacity, transportation infrastructure and geopolitical developments.

Because energy is used throughout the global economy, changes in energy prices can affect inflation, manufacturing costs, freight and consumer spending.

Precious and industrial metals

Metal commodities are commonly divided into precious metals and industrial metals. Precious metals include gold, silver and platinum, while industrial metals include copper, aluminium, zinc and iron ore.

Gold is often viewed as both a physical commodity and a financial asset, particularly during periods of economic uncertainty. Industrial metals, by contrast, are closely linked to sectors such as construction, manufacturing, electronics and infrastructure, meaning demand often reflects broader economic activity.

Agricultural commodities 

Agricultural commodities include crops such as wheat, coffee, sugar, rice and corn. These products are essential to global food production and are traded around the world.

Their prices are often seasonal because planting and harvest cycles limit how quickly supply can respond to changes in demand. Weather conditions, crop yields, transportation networks and export restrictions can all influence agricultural commodity prices.

Livestock commodities

Livestock commodities include animals raised for food production, with cattle being one of the most widely traded examples. Prices are influenced by factors such as feed costs, herd sizes, disease outbreaks and consumer demand for meat.

Although soft commodities are often associated with crops, they also include livestock products, reflecting the wider role agriculture plays in global commodity markets.

The role of commodities in everyday life

Commodities are the raw materials used to produce many of the goods and services people rely on every day. Wheat is milled into flour for bread and other food products, crude oil is refined into fuels such as petrol, diesel and jet fuel, and copper is widely used in electrical wiring, electronics and construction.

Their importance extends well beyond the products we use. Businesses monitor commodity prices to help manage production costs and plan future purchases. For example, an airline may monitor or hedge fuel prices, while a food manufacturer may track wheat prices before agreeing long-term supply contracts.

Commodity prices also play an important role in the wider economy. Governments, central banks and international organisations monitor them because changes in the prices of energy, metals and agricultural products can influence inflation, manufacturing costs and global trade. As a result, movements in commodity markets can ultimately affect the prices consumers pay for everyday goods and services.

Trading commodities: spot and futures markets

Commodities can be traded in different ways, depending on whether the buyer wants to own the physical product or gain exposure to its price movements. Two of the most common methods are spot trading and futures trading.

In spot trading, a commodity is bought or sold at the current market price, known as the spot price. Settlement or delivery typically takes place immediately or within a short period, depending on the market.

In futures trading, buyers and sellers trade standardised contracts that specify details such as the quantity, quality and delivery date of the commodity. Rather than exchanging the commodity straight away, the contract is settled or delivered at a future date. Futures are widely used by businesses to manage price risk and by traders seeking exposure to commodity price movements.

In addition to spot and futures markets, commodities can also be accessed through products such as options, exchange-traded funds (ETFs), exchange-traded commodities (ETCs), commodity-related shares and CFDs, where available. The products available vary between countries and regulators.

Trading commodities involves risk, particularly when using leveraged products such as CFDs or futures contracts. Before trading, it is important to understand how the product works, the costs involved and the risks associated with it.

The main drivers of commodity prices

Commodity prices are often changing as market conditions evolve. While each commodity responds to different influences, prices are generally driven by changes in supply and demand, as well as broader economic and geopolitical developments.

Supply can be affected by factors such as weather, production levels and disruptions to transport or supply chains. Demand also changes over time. For example, colder weather can increase demand for natural gas, while slower economic growth may reduce demand for industrial metals such as copper.

Many commodities also follow seasonal patterns. Agricultural commodities are influenced by planting and harvest cycles, while energy demand often changes throughout the year as heating and cooling needs vary. These seasonal trends can affect both supply and demand, contributing to price fluctuations.

Market conditions also play an important role. Inventory levels can influence how well markets absorb changes in supply, while geopolitical events, trade restrictions and disruptions to major producing regions can all affect prices. In addition, because many commodities are priced in US dollars, changes in the value of the dollar and interest rates can also influence commodity markets.

The difference between commodities and stocks

Commodities and stocks are both traded in financial markets, but they represent very different types of assets. A commodity is a raw material or primary product, such as crude oil, gold or wheat, while a stock represents ownership in a company. 

Commodity prices are mainly influenced by factors such as supply and demand, weather, geopolitical events, currency movements and broader market conditions. By contrast, stock prices are influenced not only by market conditions but also by company-specific factors, including earnings, financial performance, management decisions and future growth expectations.

Although commodities and stocks can be connected, they do not always move in the same direction. For example, the price of gold may rise while a gold mining company's shares fall if the business is facing higher operating costs, lower production or weaker financial results.

Another important difference is that commodities do not generate income. Unlike stocks, which may provide dividends or reflect a company's earnings potential, commodities are primarily valued according to market supply and demand.

How commodity prices affect everyday costs

Commodity prices influence the cost of many of the goods and services people use every day. Changes in the price of crude oil, for example, can affect fuel prices and transportation costs, while changes in the price of wheat or sugar can eventually be reflected in the cost of food and other grocery products.

These changes are not always immediate. As raw materials move through the supply chain, higher production and transportation costs can gradually be passed on to manufacturers, retailers and, ultimately, consumers. A rise in wheat prices may first affect flour producers before reaching bakeries and supermarkets, while higher oil prices can increase freight costs across a wide range of industries.

The same principle applies to many other commodities. Natural gas can influence household energy costs, while copper and aluminium are widely used in electronics, vehicles and construction materials. Because commodities are used throughout the global economy, changes in their prices can have a broad impact on businesses, inflation and the cost of living.

Why investors follow commodity markets

Investors follow commodity markets because price movements can provide insight into broader economic trends. Rising oil prices may reflect changes in global energy supply and demand, while copper is often viewed as an indicator of industrial activity. Gold, meanwhile, often attracts attention during periods of economic uncertainty or changing expectations for interest rates and inflation.

Some investors also include commodities in their portfolios to diversify their investments, manage inflation risk or gain exposure to specific sectors of the global economy. However, commodities can be volatile, and their prices are influenced by factors that differ from those affecting shares or bonds.

There are several ways to gain exposure to commodities. Investors may trade futures contracts, invest through exchange-traded funds (ETFs) or commodity-linked shares, or use CFDs, where available. Each approach works differently and has its own costs, risks and level of complexity.

Before investing in commodities or trading them online, it is important to understand how the chosen product works, including any fees, leverage or other risks that may apply.