How to trade commodities in Canada

If you want to diversify your investment portfolio or hedge against inflation, you might be considering investing in commodities. From gold and crude oil to wheat and coffee, there are several different ways you can gain exposure to these raw materials.

In this guide, we’ll explore how to trade commodities in Canada, the pros and cons of trading commodities, and the best platforms to check out when you’re ready to invest.

What are commodities?

Commodities are tradable raw materials. These basic goods can be sorted into four broad categories: metal, energy, livestock and agriculture.

The commodity market predates the stock market, as people have exchanged commodities like gold, food and livestock for centuries. Today, the modern commodities market operates as publicly traded exchanges that facilitate the movement of contracts for physical goods.

Investors can gain exposure to commodities through commodity futures and CFDs, by investing in exchange-traded funds (ETFs) and mutual funds, or by purchasing stocks from companies that produce commodities. It’s also possible to purchase commodities as physical goods, but doing so requires you to store the goods yourself.

Popular commodities

While far from exhaustive, this list includes some of the more popular commodities.

• Oils, such as soybean oil and crude oil
• Corn
• Cocoa
• Cotton
• Livestock
• Metals, such as gold or silver
• Oats
• Orange juice
• Sugar
• Wheat

Best platforms for trading commodities in Canada

Why should I invest in commodities?

There are a few key reasons why you should consider adding commodity investments to your portfolio:

• Profit potential. The volatility of commodity prices means there is the potential to make a tidy profit from your investment. There can be high levels of demand for these crucial raw materials—for example, the growth and industrialization of emerging economies can lead to increased demand for metals and mineral resources.
• Diversify your portfolio. Commodities also provide an effective way to diversify your investments, particularly if your portfolio is heavily exposed to financial stocks. Commodities tend to have a low correlation with stocks, so they can reduce your risk during a market downturn.
• Hedge against inflation. Commodity prices tend to increase in line with growing inflation, so investing in commodities can be a useful hedge against inflation.
• Multiple ways to invest. There are several ways you can gain exposure to commodities, so you don’t necessarily need to buy and store a physical commodity to add it to your portfolio.

Are commodities volatile?

Due to supply and demand, commodities can be more volatile than stocks, and some commodities are more volatile than others. The overall volatility of the commodities market is often reflective of global events, but can also be impacted by environmental concerns, geopolitics and more.

For example, oil tends to be more volatile than most. As one of the most liquidly traded commodities, it’s vulnerable to a variety of market-impacting events, including trade discrepancies, taxation and more. When Russia invaded Ukraine in February 2022, crude oil prices rapidly increased to more than US$100 a barrel. The oil industry is no stranger to market disruption and investors interested in this commodity will need to assess their risk tolerance before getting involved.

On the other hand, gold is typically one of the more stable commodities on the market. Gold has both historical and cultural value that predates modern currency. In fact, gold is often viewed as a safe haven for investors when the stock market is down.

How to trade commodities in Canada

There are five different ways that you can invest in commodities:

• Stocks
• ETFs and mutual funds
• Futures
• CFDs
• Purchasing the commodity

Stocks

Buying stocks is one of the simplest ways to invest in commodities. This method involves purchasing shares of companies that manufacture or sell physical goods.

You’ll need a brokerage account to invest, and it’s easy to open an account online—it’s worth shopping around for a brokerage signup bonus too. Once you’ve applied, all you need to do is fund your account to begin investing.

Before purchasing stocks, research the commodity you’re interested in and find out which companies contribute to the industry. Stock screeners are beginner-friendly research tools that can help you find a company that fits your criteria.

Once you pick a company, you enter the number of shares you’d like to purchase and execute the order. After that, you can monitor your investment by logging into your brokerage account. Check out our guide to the best stock trading apps in Canada if you’re ready to start investing.

Dive deeper: Best Canadian stocks to buy right now

Exchange-traded funds (ETFs) and mutual funds

Commodity ETFs allow you to invest in a collection of companies. Like stocks, they’re a beginner-friendly asset that can be bought and sold through a brokerage account. But unlike stocks, they offer a more diverse investment opportunity, spreading your investment across multiple companies to dilute the risk of volatility.

ETFs are a practical way to gain exposure to a variety of companies in the industry you’re interested in. Funds typically have a theme and contain a basket of stocks that conform to that theme. There are oil ETFs, gold ETFs, agriculture ETFs—an ETF for any segment of the market you can think of. There’s no shortage of choices available and you can buy and sell ETFs through your brokerage account in the same way you do stocks. Popular commodity ETFs include the CI Auspice Broad Commodity ETF, the Horizons Crude Oil ETF and the iShares Global Agriculture Index ETF.

Alternatively, you could invest in a commodity mutual fund. The basic premise is the same—mutual funds feature a collection of stocks—but they tend to have higher minimum investments and they’re traded at the end of each trading day instead of during market hours.

Related: ETFs vs mutual funds

Futures contracts

Futures contracts are one of the most complex assets on the market and are typically only traded by professional investors. New investors will want to steer clear of this security until they have a solid understanding of the market and how futures contracts work.

A futures contract is an agreement to buy or sell an asset at a set price on a certain date. Contracts can be bought and sold repeatedly until the expiration date and the contract’s value will fluctuate based on market conditions. Futures are traded on regulated exchanges like the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX) and the National Stock Exchange of India (NSE).

A futures contract is a gamble—and a risky one. If you hold a futures contract, you are obligated to fulfill the terms of that contract on its expiration date, no matter how the commodity’s price has shifted since you purchased the contract.

Futures contracts should only be pursued by experienced traders. Learn more in our guide to futures trading in Canada.

Contracts for difference (CFDs)

CFDs are another type of derivative trading that can provide exposure to commodities. With a commodity CFD, you can speculate on the price movement of an underlying commodity. Rather than ever actually owning the asset, you predict whether you think its price will rise or fall.

However, CFDs are complicated and confusing, and they also offer the ability to trade with leverage. It’s possible to lose much more than your initial investment, so CFD trading is definitely not suitable for beginners.

Dive deeper: CFD trading

Purchasing the commodity

Finally, you can invest in a commodity by actually purchasing physical goods—gold, wheat, livestock, you name it. This approach takes hands-on investing to a whole new level and is the most challenging and time-intensive method on this list.

You’ll need to locate a dealer that sells the commodity you’re interested in, purchase it and arrange for pickup or delivery. You’ll be responsible for the storage of what you purchase—a complex undertaking if you’re investing in something that’s bulky or difficult to transport. And should you plan to sell your commodity in the future, it’s up to you to identify a buyer and facilitate the transaction.

The bottom line? This method is not for first-time investors and should only be attempted by those with experience trading a specific type of commodity.

Risks of trading commodities in Canada

There are also a few drawbacks to watch out for if you’re thinking about trading commodities in Canada:

• Risk. If you’re looking for a safe investment with minimal risk, you might want to consider other options.
• High volatility. Commodity prices are influenced by a wide range of factors and can be highly volatile, so there’s a chance that the price of a commodity could quickly move against you.
• Risks of some trading methods. Futures contracts and CFDs are highly complicated and risky, so they’re not suitable unless you’re an experienced trader. The easiest approach for beginners is generally to stick to ETFs or individual stocks.
• Won’t provide an income. In the words of Warren Buffett, “The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn’t going to do anything for you.” So rather than buying commodities themselves, you might want to look for stocks, ETFs and mutual funds that pay regular dividends.
• Environmental concerns. Investing in certain commodities and companies may raise concerns for investors who take a strong ESG (Environmental, Social and Governance) focus to managing their portfolio.

Bottom line

Commodities may help diversify your investments, but they are prone to volatility. Conduct some research before investing to make sure the commodity you purchase aligns with your portfolio and investment strategy.

Explore your brokerage account options with multiple trading platforms to find the account that best meets your needs.

Frequently asked questions about investing in commodities

• Are commodities risky investments?

  Yes, commodities are typically considered to be risky investments. Their prices can be volatile and are influenced by a wide range of factors, including everything from weather to geopolitical tensions, so price movements can be unpredictable.

• What are hard commodities and soft commodities?

  Commodities can be split into two different categories: hard commodities and soft commodities. Hard commodities are natural resources such as metals, oil and coal, while soft commodities are agricultural products like wheat, coffee and livestock.

• How can I trade commodities in Canada?

  You don't necessarily need to buy, transport and store a physical commodity to gain exposure to these types of assets. Beginner investors might like to consider investing in a commodity-themed ETF or mutual fund, or investing in the stocks of individual companies. Experienced traders also have the option of more complicated investments, such as futures contracts and CFDs.

• What do I need to do to start trading commodities in Canada?

  You'll need to create an account with an online broker to invest in commodities. Compare online trading platforms to find a broker that offers access to the assets and markets you want to trade and charges the lowest fees. You can sign up for an account by providing your personal information, contact details and proof of ID. It's then a matter of depositing funds into your account before placing your first trade.