Last Updated on 14 October, 2021 by Samuelsson
While commodity trading may not be as popular as Forex, index, or stock trading, it continues to get attention due to the unique nature of the asset class. Commodities are very good for hedging against inflation, and they serve as an excellent vehicle for portfolio diversification. For speculative traders, commodities are seen as a favorite alternative to currency trading.
There are two distinct categories of commodities: hard and soft commodities. Hard commodities include things like oil, natural gas, coal, and gold, which are mined or extracted from the earth. They are mostly used in the industries and are grouped into several sub-categories, such as industrial metals, precious metals, and energy. Soft commodities (simply known as softs), on the other hand, consist of items that are grown or harvested and generally used for personal consumption. Examples include wheat, corn, soy, sugar, cattle, and orange juice, which are heavily traded across global exchanges.
Different factors drive different categories of commodities. While the highest consumption of hard commodities is in industry, the financial sector uses precious metals as a store of value and a hedging tool. For soft commodities, the major factor driving demand is personal consumption. With all of them presenting excellent trading possibilities, one can only access these opportunities via online commodity brokers.
Who is a commodities broker, and how are commodities traded?
Commodities are mostly traded as derivative products — futures and options — on the commodity exchanges, such as the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), the London Metal Exchange (LME), the Dubai Mercantile Exchange (DME), the Zhengzhou Commodity Exchange (ZCE), and the Tokyo Commodity Exchange (TOCOM). To be able to access the market, you need the services of a commodity broker.
Basically, a commodity broker is an individual or a firm that places trades on exchanges on behalf of traders. The brokers are usually members of a commodity exchange, and some own seats the exchanges, with traders on the floor for open-outcry pit trading. However, the majority access the market via ECN methods and provide online platforms to their clients.
There are three main classifications of real commodity brokers: the introducing brokers (IBs), the futures commission merchants (FCMs), and individuals as associated persons (APs). These commodity brokers offer traders access to options and futures trading. Options offer the buyer the right, but not an obligation, to buy the specified commodity at a future date, while futures imposes an obligation to buy and deliver the commodity on the agreed-upon date.
As we stated earlier, commodity trading takes place on distinct commodity exchanges, such as the London Metal Exchange, which is popularly known for trading metal futures. The CME and ICE are known for all kinds of commodity futures, especially energies. On these exchanges, most commodities are quoted in U.S. dollars, but a few are quoted in other currencies like the GBP.
It is important to note that apart from the options and futures markets, commodities may also be traded indirectly on the equities market, through mutual funds and exchange-traded funds (ETFs). However, a more common and easily accessible way to gain exposure to the commodity market is through a special financial derivative known as a contract for difference (CFD), which is a contract between a multi-asset broker and a trader to exchange the difference in the price of an asset (a commodity) between the time the asset was bought and the time it was sold, without ever dealing with the physical asset.
In essence, with CFD, the trader has no business dealing with the physical commodity, and the broker offers the pricing based on the prices of the corresponding commodity futures and continuously roll over at expiration to the next corresponding contract. Since most traders do not want the actual delivery of the commodity they are trading, many of them usually opt for CFDs.
Moreover, CFD trading allows traders to use higher leverage and smaller contract sizes than would have been possible with traditional trading. The combination of smaller contracts and bigger leverage ensure significantly lower initial capital requirements. However, CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Consider whether you understand how CFDs work before trading them.
While the traditional commodities brokers grant traders direct access and exposure to options and futures trading, online brokers, especially Forex brokers offer traders the opportunity to speculate on the commodity market via CFDs. However, more established multi-asset online brokers also offer direct access to the futures and options commodity markets.
How to choose the best commodities broker for commodity trading
The truth is, trading with the right commodities broker is as important as a trading strategy. Each trader must define the qualities to look for in top commodities brokers. While there are several factors to consider, these are major ones:
Whether you are an experienced commodity trader or you’re just starting as a retail investor, the first thing you should check is whether the commodities brokers you are considering are, indeed authorized and a registered member of a commodity exchange. Find out the government agencies that regulate the broker’s operations in every country where it operates. The broker should state this on its website.
In the US, commodity trading is regulated by the Commodity Futures Trading Commission (CFTC), which is an independent federal agency that regulates the derivatives markets in the country — that includes all futures contracts and swaps, as well as some kinds of options contracts and CFDs. In the UK, commodity exchanges and brokers are regulated by the Financial Conduct Authority (FCA), while the Australian Securities and Investments Commission (ASIC) regulates the commodity markets in Australia.
Margin requirements and leverage
Commodities are mostly traded as futures contracts, and the futures markets allow much lower margins — as low as 2-5% of the total value of the contract — which means you can trade with bigger leverage. While the margin requirements are determined by the futures exchange itself using some risk-based algorithms, the brokers themselves can set their own within the allowable range. Some brokers post the margin requirements as fixed prices instead of percentages.
Also, many brokers offer commodity trading in the form of CFDs, and in this case, they can set their margins and leverage as they want. CFDs are complex instruments that come with a high risk of losing money rapidly due to leverage. Remember, the higher the leverage, the higher the risk, which is why brokers offer stop losses and other types of investor fund protection. But the point is, your capital is at risk, so you should consider whether you understand how CFDs work before deciding to trade them.
Account types and products
Many brokers offer different account types — most commonly ‘standard’ and ‘professional’ accounts. While professional accounts require more trading experience and capital, standard accounts have simpler verification processes. Similarly, brokers offer different ways to speculate on trading instruments and different categories of products, and different account types may have access to different products. Be sure that the broker offers what you want to trade for the account type you want to open.
Features of the broker platform
These days, trading is done electronically, so a broker’s platform must be simple enough for retail investors to use. But the platform should also have advanced features to also be useful to the more experienced traders. In addition to facilitating trading transactions, a trading platform should also provide research, analytic tools, education, and sometimes, news feed.
Both the specialized commodity brokers and CFD brokers provide trading platforms to their clients, and these platforms are usually available in desktop and web versions. Most of the trading platforms offered by brokers are also available as fast and convenient mobile apps that can be downloaded from the App Store and Google Play Store.
Other trading resources
Online commodities brokers with full support for automated trading solutions, including VPS hosting, are better in case you may want to trade commodities using computer algos. Also, the commodities brokers should have in-depth research and market commentaries that provide fundamental insights.
Commission and fees
There are various fees charged for different aspects of the trading process, and the common ones are the spread and commissions. While the commission is what the broker charges for helping the trader to buy and sell the contracts at the exchange, the spread is the difference between the bid price and the ask price. For most brokers, the commission decreases as the trading volume gets larger.
Some brokers offer fixed prices per contract, but others have more complex pricing schemes. Also, there may be exchange fees, regulatory and clearing fees, as well as overnight position fees. When choosing a broker for commodity trading — whether you want to trade the futures contracts directly or just the CFDs — go for firms that offer low fees and commissions, but more importantly, that have clearly defined fees and a transparent pricing system.
Funding and withdrawal methods
Check the broker’s funding and withdrawal methods and be sure that that they are easy to use and the processing period is not too long. In fact, your deposits and withdrawals should be processed within 2 to 3 days. The withdrawal aspect is very important because it is generally more difficult to get your money out after a deposit, and since retail investor accounts lose money most of the time, you may want to know you can take your capital if you later decide that trading commodities is not your thing.
Very important: Is the broker’s customer support team always available, especially during trading hours? Your money is on the line here, so you want to be sure that the customer support team is always available to assist at any time they are called. Also, the method of reaching them should be easy. In fact, all respected online brokers offer professional, multilingual customer support that is available 24/7.
The broker’s history
Consider the history of the broker too, as you won’t like to trade with a broker that is new in the business and has not been tested and trusted. Operational experience is necessary to survive in the market. So, a minimum of five years of operational experience and a clean regulatory track record will provide traders with sufficient evidence of a well-managed commodity broker.
It may be necessary to check whether the broker has an international presence in multiple countries. Can the broker’s team communicate to you in your local language or any other language you are fluent in? A broker that has a global reach can have access to different commodity exchanges around the world.
The top commodity brokers for commodity traders
While there are many other online brokers for futures trading, our choice of best futures brokers and futures trading platforms includes the following:
- Interactive Brokers
- TD Ameritrade
- Charles Schwab Futures
- Generic Trade
TradeStation is a multi-asset U.S. brokerage firm that offers online financial trading services around the world. The firm offers state-of-the-art trading technology and online electronic brokerage services to active individual and institutional traders both in the U.S. and the rest of the world. The broker offers direct access to the commodity futures and options markets. The company’s innovative trading and analysis platform provides one-click access to all major commodity exchanges and market centers in the United States and the rest of the world. Let’s take a look at the key features of the broker:
- Regulation: The broker is a member of NYSE, FINRA, CME, SIPC, and more. In the United States, the broker is regulated by the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission, and the National Futures Association (NFA). It is also regulated by the Financial Conduct Authority in the UK and the Financial Services Agency (FSA) of Japan.
- The platform: TradeStation offers three trading platforms: TradeStation Desktop, TradeStation Web Trading, and TS Crypto. The desktop platform comes with advanced trading tools, while the Web Trading platform, which can easily be accessed via the broker’s website, is designed for traders seeking simplicity. TradeStation also has a mobile app that is meticulously designed to provide the functionality that active and professional traders need to succeed, including robust charting and watch list. TradeStation’s brokerage customers can use the platform free of charge, but non-customers will have to pay subscription fees to use the platform.
- Commodities: TradeStation offers direct access to futures contracts of different categories of commodities, including precious metals, crude oil, agricultural commodities, and recently, cryptocurrencies, which many consider a commodity.
- Commission and fees: The broker has different commission structures. But the most commonly used pricing plans — TS Select and TS Go — offer free market data, and incur no monthly platform charges. However, if you want to trade bitcoin and other popular cryptocurrencies, TradeStation Crypto offers competitive fees that start from 0.5% for market orders and limit orders for balances up to $100k.
Interactive Brokers (IBKR) is a renowned multi-asset online broker with global access. IBKR is present in many countries around the world, including the United States, the UK, Australia, Canada, Japan, Singapore, India, Ireland, Luxembourg, Hong Kong, and Hungary, and they are regulated in every country they operate in. IBKR offers clients from all over the globe the ability to invest worldwide at the lowest cost while providing a powerful suite of technology to help them perform sophisticated portfolio analysis and optimize their trading speed and efficiency. Here are the key features of the futures broker:
- Regulation: In the US, IBKR is a member of NYSE – FINRA – SIPC and regulated by the Securities and Exchange Commission and the Commodity Futures Trading Commission. The broker is regulated in any country it operates — it is regulated by the Financial Conduct Authority in the UK, the Investment Industry Regulatory Organization of Canada (IIROC) in Canada, the Australian Securities and Investments Commission in Australia, and so on.
- The platform: Interactive Brokers provides traders with the Trader Workstation (TWS) platform. TWS is designed for advanced traders and is considered the industry’s best platform for trading futures contracts. The platform comes with tools like Algo trading, Options Strategy Lab, Volatility Lab, Risk Navigator, Market Scanner, Strategy Builder, Portfolio Builder, and the IBot, which uses a foundation of artificial intelligence to quickly service customer requests via chat (or voice in the iPhone app). The brokers’ mobile trading app is well supported across all devices, and it offers robust charting with over 70 optional indicators and easy customization, full-featured order entry, and portfolio management.
- Commodities: IBKR offers commodities futures and options on more than 35 market centers worldwide. The broker offers soft commodities, livestock, energy, and metals.
- Commission and fees: Interactive Brokers offers two pricing plans: IBKR Pro (for professionals) and IBKR Lite (for casual traders). On the IBKR Lite plan, there are no inactivity fees or data fees, but there are fees on the IBKR Pro plan.
TD Ameritrade is a US-based multi-asset brokerage company that offers online trading services, covering all financial products, including commodity futures contracts and commodity ETFs (ETCs). In October 2020, Charles Schwab acquired the company, but let’s take a look at their features:
- Regulation: The broker is a member of the FINRA/SIPC and is regulated by the Commodity Futures Trading Commission. It is now a wholly-owned subsidiary of The Charles Schwab Corporation, which is also regulated by the relevant financial agencies.
- The platform: The broker provides traders with a top-rated trading platform that is available in desktop, web, mobile, and mobile web versions. Known as thinkorswim, the desktop platform is equipped for trading commodities as futures contracts. The platform features a robust range of technical analysis tools, charting tools, backtesting capabilities, real-time news, quotes, market heat maps, and more. The web-based platform can be accessed via TDAmeritrade.com, while the TD Ameritrade Mobile (iOS and Android) and the TD Ameritrade thinkorswim app are available on the app stores.
- Commodities: TD Ameritrade offers direct futures trading in commodities, covering metals, grains, softs, energy, forest, and livestock. Since retail investor accounts lose money trading individual commodity futures, the broker also offers commodity ETFs which presents low-risk exposure to the commodity markets.
- Commission and fees: The broker charges a $2.25 fee per contract on futures and options on futures. In addition to the commission, there will be exchange and regulatory fees.
Charles Schwab Futures
With its headquarters in California, Charles Schwab is a US-based multinational financial services company. It offers full-service brokerage products — including direct access to commodity futures — to institutions and retail investors alike.
- Regulation: Charles Schwab and its subsidiaries are regulated by the Security and Exchange Commission, the Commodity Futures Trading Commission, and the National Futures Association. They are also a member of the SIPC.
- The platform: The broker offers a web-based trading platform that can be accessed via the Schwab website. The platform is freely available to all trading services clients. There is also a downloadable platform, StreetSmart Edge, which has a suite of programs called StreetSmart Central for options trading. The broker also supports mobile trading, offering both the Schwab and StreetSmart mobile trading apps.
- Commodities: Charles Schwab offers direct access to commodity futures trading, covering the following commodities: crude oil, natural gas, electricity, gold, silver, steel, corn, wheat, and sugar.
- Commission and fees: The broker charges $1.50 per contract. Other fees may apply.
Founded in 1982 in the US, the broker is the pioneer of online trading for retail investors. The broker is a leading online financial services firm that offers a first-class experience to online commodity investors and traders, backed by personal professional guidance. The provides a high-tech trading platform that offers retail investor accounts access to trade commodity futures listed on the CME and ICE US. Here are the features of this broker:
- Regulation: As a US-based brokerage firm, E*TRADE is a member of the FINRA, NFA, and SIPC. The broker is regulated by the Securities and Exchange Commission and the Commodity Futures Trading Commission.
- The platform: The broker offers two trading platforms — E*TRADE Web and Power E*TRADE — both of which are freely available to all customers, with no trading activity or balance minimums requirements. The E*TRADE Web platform offers free streaming market data, free real-time quotes, analyst research stock screeners, over 100 technical studies, more than 30 drawing tools, streamlined trade tickets, customizable options chain views, live market commentary, and more, while the Power E*TRADE platform is suitable for highly frequent traders.
- Commodities: The broker makes it possible for retail investor accounts to gain direct access to commodity futures quoted on the CME and ICE US, including metals, energies, and Bitcoin futures. They can trade E-mini contracts. Retail investor accounts lose money when trading standard contracts, so the E-mini contracts allow them to manage their capital better.
- Commission and fees: There is a $1.50 per contract per side commission. For Bitcoin futures, the commission is $2.50 per contract per side. In addition to the commission, there can be other fees.
A US-based financial services provider, Generic Trade has, for more than 10 years, been offering retail traders financial security and stability, cutting edge trading technology, and very low commissions/fees that allow them to compete with professional and institutional traders.
- Regulation: Generic Trade is registered with the Commodity Futures Trading Commission and is a member of the National Futures Association.
- The platform: Generic Trade offers three commodity trading platforms. The Generic Trader Online is a web-based platform, while Generic Trader Professional is a powerful desktop platform. There is also Generic Trader Mobile, which is a mobile platform for Android and iOS devices.
- Commodities: The broker offers access to the commodity futures quoted on the CME, including energies, agriculture, and metals.
- Commission and fees: Generic Trade is a true deep discount futures firm, charging only 59¢ commission per side for all trades (futures or options on futures) placed on either platform. *The only additional transaction fees are those charged by the exchanges and NFA (ranging from $.18 to $2.17 – subject to change), which apply to all firms.
Lightspeed is a New York-based futures broker that caters to professional or extremely active traders involved in day trading. The broker offers access to the commodity futures market on the CME, NYMEX, ICE Europe, and others.
- Regulation: The broker is a member of the FINRA (Financial Industry Regulatory Authority) and is regulated by the Commodity Futures Trading Commission.
- The platforms: There is the Lightspeed Web/Mobile Trader platform, which is best suited for non-professional individual investors, and the desktop-based Lightspeed Trader platform for more active traders. Traders pay a $130 monthly platform fee for access, but the fee may be reduced by any commissions generated from trading.
- Commodities: The broker offers direct access to commodity futures contracts and options on commodity futures that are quoted on the CME, NYMEX, Eurex, ICE Europe, ICE US, COMEX, and others.
- Commission and fees: Lightspeed charges $1.29 per contract per side commission on futures contracts and $1.79 per contract per side on options on futures contracts. Other service fees may apply.
IG is a world-leading online trading provider that gives you access to opportunities across thousands of financial markets, including Forex and CFDs. The broker offers CFD trading in commodities, giving individual traders the opportunity to play the commodity market without bothering about contract expirations and the physical delivery of the commodity. However, CFDs are complex instruments and come with some special risks that can make retail investor accounts lose money, even the entire trading capital. Consider whether you understand how CFDs work before trading them because your capital is at risk — you can lose money when trading CFDs.
- Regulation: The broker is regulated by the Financial Conduct Authority and the Australian Securities and Investments Commission.
- The platform: IG provides traders with the MetaTrader 4 platform, as well as a WebTrader and mobile trading apps.
- Commodities: The broker offers CFD trading in different commodities, including metals, energies, softs, and agricultural commodities.
- Commission and fees: The commission is added to the spread, and the value varies with the type of commodity. The minimum deposit is $300. However, note that you can lose money when trading CFDs.
eToro is a popular ‘social trading platform’ that allows traders can track the performance of other traders and copy their trades directly, but it also offers brokerage services. For more than a decade, eToro has been a leader in the global Fintech revolution, offering a popular social trading network with millions of registered users and an array of innovative trading and investment tools. Traders have access to several categories of CFDs with a beginner-friendly mobile app for iOS and Android.
- Regulation: The broker is regulated by the Financial Authority, the Australian Securities and Investment Commission, and the Cyprus Securities and Exchange Commission.
- The platform: eToro provides traders with a web-based trading platform and mobile trading apps for Android and iOS devices.
- Commodities: The broker offers CFD trading in many different commodities, including softs, precious metals, energies, and others. Apart from trading commodities by yourself, you can benefit from the social trading network.
- Commission and fees: The fees vary with the type of commodities. However, you should know that you can lose money when trading CFDs
AvaTrade is a financial trading broker that offers CFD trading in several commodities. The broker has been in business for many years, offering traders a flexible exposure to the commodity markets. While it is common that retail investor accounts lose money, the high flexibility of CFD trading puts the control in the hands of the investors.
- Regulation: The broker is regulated by the Australian Securities and Investments Commission, the Financial Services Authority, and the Financial Sector Conduct Authority.
- The platform: AvaTrade provides traders with a choice of six desktop trading platforms and two mobile applications. The platforms offer enough variety that’s feature-packed for an advanced trader and simple enough for a beginner.
- Commodities: The broker offers CFD trading in different categories of commodities, including metals and energies. However, the broker offers no social trading platform for trading commodities.
- Commission and fees: Min deposit: 100. The commission is added in the spread and varies with the type of commodity. However, note that you can lose money when trading CFDs.
XTB is a global leader in FX and CFD trading, providing access to over 1500 financial markets including FX, indices, shares, commodities, and more. The broker offers leverage of up to 500:1.
- Regulation: The broker is regulated by the Financial Conduct Authority and the Cyprus Securities and Exchange Commission.
- The platform: The broker provides traders with its proprietary xStation5 trading platform, which is an award-winning web-based trading platform that is easy to use and has super-fast execution speed.
- Commodities: XTB allows you to trade CFDs of popular commodities, including Gold, Silver, and Oil.
- Commission and fees: The commission varies with the type of commodity. While other fees may apply, there is no overnight cost for holding open positions in commodities. XTB has no minimum deposit. However, you should know that you can lose money when trading CFDs.