Q:

How do you trade commodities?

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Quick Answer

Futures contracts are the most popular way to trade commodities, according to Investopedia. A futures contract is a deal to buy or sell a certain number of commodities on a later date and at an agreed price. Investors use commodities to diversify their portfolio due to the liquidity of these investments and the ability to trade on margin. Examples of traded commodities are gold, silver, oil and gas.

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Full Answer

A commodities futures contract involves a number of details, explains NerdWallet.com. The two parties entering a futures contract must agree on the unit of measurement, the quantity and quality of the commodity, the currency unit and the method of settlement.

Trading commodities through futures contracts does come with risk, according to ZeroMillion.com. The buyer of a futures contract is expecting the price of the commodity to go up, while the seller is expecting the price to go down. However, the liquidity of most futures contracts means that risk is often minimal.

The biggest advantage of commodity trading results from hedging against other investments. Even during times of economic crisis, investors are bullish about metals such as gold and silver. Trading in these commodities offers protection against inflation or a tumbling stock market, states MarketCalls.

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