Ways to Trade Commodities: Futures, Options, CFDs, ETFs and Physical Gold

You can trade commodities through spot deals, futures, options on futures, CFDs, exchange-traded funds (ETFs) or by buying the physical metal. These routes differ in what you actually own, how much leverage you use, what it costs to hold a position and whether you can lose more than you put in. For most beginners, an unleveraged ETF or a small physical gold purchase is the gentlest start, while futures and CFDs need the risk skills taught later in this course.

Spot

The spot price is the price for immediate delivery. In the London gold market, a spot trade settles two business days later. When you see XAUUSD on a trading screen, that is the spot price of one troy ounce of gold in US dollars. Most individuals do not trade physical spot metal directly; they trade products that track it.

Futures

A futures contract is a standardised agreement, traded on an exchange, to buy or sell a fixed amount of a commodity at today's price on a set future date. You post a deposit called margin instead of paying the full value, gains and losses are settled daily, and the contract eventually expires. A clearing house stands between buyer and seller, so you do not depend on the other trader paying.

Futures are transparent and regulated, but contract sizes are large: one standard gold contract is 100 ounces, about $400,000 of gold at $4,000 an ounce. Smaller micro contracts (for example 10 ounces of gold or 100 barrels of oil) make futures more accessible. Section 2 of this course covers futures in depth, starting with how a futures contract works.

Options on futures

An option gives the buyer the right, but not the obligation, to buy (a call) or sell (a put) a futures contract at a fixed strike price until the option expires. The buyer pays a premium to the seller.

Buying options caps your loss at the premium, but options lose value as time passes (time decay), so you need the move to happen soon enough. Selling options collects the premium but can produce losses far larger than it. Options pricing is an advanced topic; treat options as a specialist tool, not a beginner's shortcut.

CFDs

A contract for difference (CFD) is a private contract with a broker: you and the broker exchange the difference between the opening and closing price. You never own the commodity. Common CFD names are XAUUSD (gold), XAGUSD (silver), USOIL or WTI (US crude), UKOIL or BRENT (Brent crude) and NATGAS. Names and contract sizes vary by broker.

CFDs let you trade very small sizes, such as one ounce of gold, which helps with careful position sizing. The costs and risks:

• Spread: the gap between the buy and sell price, paid on every trade.
• Overnight financing (swap): a daily charge or credit for holding positions overnight.
• High leverage: retail leverage on commodity CFDs is capped at 20:1 for gold and 10:1 for other commodities in the EU and UK, but some offshore brokers offer 100:1 or more.
• Counterparty risk: your broker is the other side of your trade, so its regulation and financial strength matter.

CFDs are not available to retail traders in the United States. Rules change, so check what applies where you live and whether your broker is licensed by a regulator you can rely on. In Pakistan, check the SECP's website for current rules and public warnings about unauthorised platforms.

ETFs and ETCs

An exchange-traded fund (ETF), or exchange-traded commodity (ETC) in some markets, is a fund whose units trade like shares on a stock exchange.

• Physically backed gold funds, such as SPDR Gold Shares (GLD), hold gold bars in vaults. Their price tracks gold minus a small annual fee.
• Futures-based funds, such as the United States Oil Fund (USO), hold futures contracts and must keep rolling them. When later contracts are more expensive, this rolling drags returns below the spot price, sometimes heavily, as you will see in the lesson on contango and backwardation.
• Leveraged ETFs reset their leverage daily and can lose value over time even if the commodity ends flat. They are built for very short holding periods.

Buying shares of mining or oil companies is another indirect route, but those shares also carry company risks such as costs, debt and management.

Physical gold and the tola

Many people in Pakistan, India and the Gulf buy gold as bars, coins or jewellery. In Pakistan, gold is usually priced per tola. One tola is 11.6638 grams, and one troy ounce is 31.1035 grams, so one tola is 0.375 troy ounces.

Physical gold has no leverage and no margin call, but it has its own costs: jewellery carries making charges, 22-karat gold is about 91.7% pure, dealers usually deduct a percentage when you sell back, and you must store it safely. The gap between the buying and selling price can easily be several percent.

Side-by-side comparison

Route	Do you own the commodity?	Leverage	Main holding costs	Can you lose more than your deposit?
Physical gold	Yes	None	Storage, buy/sell spread, making charges	No
Physically backed ETF	Indirectly (fund units)	None	Annual fee	No
Futures-based ETF	No, the fund holds futures	None (unless leveraged ETF)	Fee plus roll costs	No (unleveraged)
Futures	A contract that can lead to delivery	High, set by margin	Commissions, rolls	Yes
Buying options	A right, not an obligation	Built in	Premium, time decay	No, the premium is the maximum
Selling options	An obligation	High	Margin	Yes
CFDs	No	High, set by broker	Spread, overnight swap	Depends on the broker; EU and UK retail clients have negative balance protection

Which route should a beginner use?

Start by deciding what you are trying to do. If you want long-term exposure to gold, a physically backed fund or physical metal bought at a fair spread is simple. If you want to learn active trading, practise on a demo account first, then use the smallest sizes available (micro futures or small CFD positions) with strict risk per trade, as taught in the leverage lesson.