Adding commodities to your portfolio is a great choice for UAE investors to diversify their portfolios. Commodities are basic goods that people eat or need to transport themselves or heat their homes. Beef, gold, oil, natural gas, and grains are examples of commodities. You don’t need to be a professional trader or qualified investor to trade commodities in the UAE and it is easy to open a brokerage account.
In this guide, we will explain where and how to trade commodities in UAE.
How the Commodities Market Works
Commodity trading goes back a long time and many countries, empires, and economies were formed with it. In the past people traded commodities in a physical location where a trade would take place. Nowadays countries, companies, and individuals still trade commodities, both physically and online. Online commodity trading happens at commodity exchanges like the Chicago Mercantile Exchange (CME), the New York Mercantile Exchange (NYMEX) and the Dubai Gold and Commodities Exchange (DGCX).
The commodity market works based on supply and demand from participants. When a lot of individuals, companies, or governments want certain goods, this demand raises the price of the goods. If nobody wants a certain good, its price drops.
Types of Commodities
Commodities fall under four different categories: energy, metal, livestock and meat, and agricultural. Precious metals like gold, silver, copper, and platinum fall under the metals category. Investors invest in gold and other metals because they are valuable, have real use cases, and protect against inflation. Crude oil, heating oil, and natural gas are energy commodities. The Organization of the Petroleum Exporting Countries (OPEC) sets and monitors countries’ production outputs of these commodities.
Sugar, cotton, coffee, cocoa, rice, wheat, soybeans, and corn are agricultural products, whilst lean hogs, pork bellies, feeder cattle, and live cattle are livestock commodities. Investors and traders speculate on the prices of these commodities and take things like drought and animal deceases into account.
1. Trading Commodity Futures
You can trade commodities with futures contracts. Commodity futures contracts are legal agreements that specify a certain commodity to be sold for a certain price in the future. The buyer has the right to buy the commodity from the seller at the price agreed upon and the seller must deliver.
Manufacturers and farmers benefit from futures contracts because it guarantees their cash flow. Buyers like airplane companies benefit from futures contracts because they need a lot of fuel at stable prices. Commercial and institutional investors participate in the futures market.
The most common way to trade commodity futures in UAE is through a online broker offering commodity futures. The best online brokers for commodity futures trading are: eToro, AvaTrade and Saxo Bank.
Futures Trading in UAE
Futures trading in UAE is available through the Dubai Gold and Commodities Exchange (DGCX) and the Dubai Mercantile Exchange (DME). Trading on both exchanges is available through on online brokerage account. Profits made with commodity features are not subject to taxation in UAE.
2. Futures Options Commodity Trading
Trading futures options on commodities is less risky than trading commodity futures because you have the right, but are not obligated, to buy or sell the futures contract if the market doesn’t move in your desired direction. This way you limit your potential losses. We recommend trading futures options on commodities at PocketOption.
3. Trading Commodities Through Stocks
You can trade commodities through stocks by investing in stocks of companies that are commodity-related. For instance, you could buy stocks in oil refineries or drilling companies to invest in oil. Another example is investing in gold mining or copper smelting companies in the case you want to invest in those commodities. Stocks are less volatile than commodities, diversify your portfolio, and reduce risk.
The downside of investing in commodity-related stocks is that this doesn’t give you direct exposure to the commodity and there can happen something with the companies that has nothing to do with the commodity they are related to that decreases the stock’s value. eToro is our top-rated broker to trade commodity stocks with.
4. Trading Commodities Through ETFs
Another way of trading commodities is through ETFs, which are index funds that track the value of commodities or commodity-related stocks. An example of a commodity ETF is Invesco Bloomberg Commodity UCITS ETF. By investing in commodity-related ETFs you invest indirectly in commodities and reduce your risk. The downside of investing in commodities via ETFs is that the price movement of the commodities might not be reflected in the ETFs price.
Here is a breakdown of how to invest in ETF in UAE.
5. Trading Commodities Through Mutual Funds and Index Funds
Mutual funds and index funds are alternatives to investing in commodities. These funds give you indirect exposure to the commodity-related industries the companies are part of. Some mutual funds are linked to commodities which give you direct more exposure to them. Professional fund managers manage mutual funds, which is good for people who don’t have time to trade the markets themselves.
Alternatively, you could trade mutual funds via a commodity pool operator (CPO). These are professionals that pool investors’ money together and invest in futures contracts and options. CPOs have CTAs in their team, which are commodity trading advisors registered with the Commodity Futures Trading Commission (CFTC).
Commodity trading in UAE is done via online trading platforms like eToro, AvaTrade, and Saxo Bank. With these brokers, you trade energy, metal, livestock, and agricultural commodities from exchanges like the Dubai Gold and Commodities Exchange (DGCX). You can trade commodity futures and ETFs, commodity-related stocks, or mutual funds. These financial instruments give different exposure to commodities and have varying risk levels. We recommend trading commodities in UAE at eToro, our top-rated regulated broker, which offers commission-less commodity trading accounts that are Sharia-compliant.