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This commodity trading glossary explains the words you’ll run into most often in commodity news, broker platforms and fund documents. Each term gets a short, plain-English definition, and where a term only makes sense next to another one, we say so. Bookmark this commodity trading glossary and come back whenever a word trips you up.
How to use this glossary
The terms in this commodity trading glossary come in three layers. The first describes the contract itself: size, expiration, tick, settlement. The second describes your account: margin, leverage, mark to market. The third describes the shape of the market: spot versus futures, contango, backwardation, open interest. If you learn the terms in that order, each layer makes the next one easier. The CFTC Futures Glossary provides a primary reference for industry terminology. The entries below are alphabetical so you can look things up quickly, so use the alphabetical groups for lookup and the three layers above as a learning plan.
A to C
Arbitrage: buying and selling the same or closely related commodity in two places at once to lock in a price difference. Arbitrage is why the same barrel of oil rarely trades at wildly different prices in two liquid markets for long.
Ask: the lowest price a seller is willing to accept right now. Also called the offer.
Backwardation: a market where near-dated futures cost more than later-dated ones. Often a sign of tight current supply.
Basis: the difference between a commodity’s local cash price and its futures price. A grain elevator in Iowa quotes corn as “20 under December,” meaning 20 cents below the December futures price.
Bid: the highest price a buyer is willing to pay right now. The gap between bid and ask is the quoted spread; its effect depends on how your order executes.
Bullion: gold, silver or other precious metal in bar or coin form, valued mainly by weight and purity.
Cash settlement: a futures contract that settles in money against a reference price rather than through delivery of the commodity. Many index and some energy contracts work this way.
Clearinghouse: the organization that stands between buyer and seller in every exchange-traded futures trade and guarantees it will be honored. It’s the reason you never need to know who’s on the other side of your trade.
Contango: a market where later-dated futures cost more than near-dated ones, usually reflecting storage and financing costs.
Contract size: the fixed quantity of a commodity covered by one futures contract. For example, the benchmark gold futures contract on COMEX covers 100 troy ounces, so a one-dollar move in the gold price changes the contract’s value by one hundred dollars.
Crack spread: the difference between the price of crude oil and the refined products made from it, such as gasoline and diesel. Refiners watch it as a proxy for their profit margin.
Crush spread: the soybean equivalent of the crack spread: the value of soybean meal and oil minus the cost of the beans that produce them.
D to H
Daily price limit: the maximum amount a contract’s price may move in one session before trading is halted or paused. Check the product rules for limits, bands and any expanded-limit procedure; arrangements vary.
Delivery: the transfer of the physical commodity when a physically settled futures contract expires. Most speculators offset their positions well before this happens.
ETF (exchange-traded fund): a fund whose shares trade on a stock exchange. Commodity ETFs may hold the physical commodity or futures contracts, and the difference matters a great deal for how they behave.
Expiration: the date after which a futures contract stops trading.
First notice day: the first day on which a seller may notify the exchange of intent to deliver. Traders who don’t want delivery typically exit or roll before this date.
Forward contract: a private, customized agreement to buy or sell a commodity at a future date. Unlike a futures contract, it isn’t standardized or guaranteed by a clearinghouse.
Front month: the nearest actively traded futures contract. News headlines usually quote it.
Futures contract: a standardized agreement to buy or sell a set quantity of a commodity at a set price on a future date. The CFTC notes that the price and amount are fixed at the time of agreement.
Hedger: a business that uses futures to reduce price risk on a commodity it produces or uses, such as a farmer or an airline.
L to O
Leverage: controlling a large position with a relatively small deposit. It magnifies both gains and losses.
Limit order: an order to buy or sell only at a specified price or better.
Long: holding a position that benefits if the price rises.
Maintenance margin: the minimum account equity required to keep a futures position open. Falling below it triggers a margin call.
Margin (initial): the deposit required to open a futures position. CME Group calls it a performance bond, not a down payment.
Margin call: a demand from your broker to add funds after losses push your account below maintenance margin.
Mark to market: the daily process of crediting gains and debiting losses on open futures positions.
Market order: an order to buy or sell immediately at the best available price. Fast, but in a thin market you may get a worse price than the last one you saw on screen.
Offset: closing a futures position by taking the opposite trade in the same contract.
Open interest: the total number of futures contracts that remain open and not yet offset or delivered. Each outstanding contract has both a long and a short. A change in open interest alone cannot establish traders’ motives or predict price direction.
P to Z
Physical settlement: a contract that ends in delivery of the actual commodity rather than a cash payment. Settlement depends on the exact product; do not infer it from the commodity name.
Roll: closing a futures position in an expiring contract and opening one in a later month. Futures-based funds roll regularly.
Roll yield: the return effect associated with maintaining exposure across delivery months as contracts approach expiry. For long exposure, contango can contribute negative roll yield and backwardation positive roll yield, without guaranteeing the total return.
Settlement price: the official closing price the exchange assigns to a contract each day, used to mark accounts to market. It can differ slightly from the last traded price.
Short: holding a position that benefits if the price falls.
Speculator: a trader who has no need for the physical commodity and aims to profit from price changes.
Spot price: the price for immediate delivery of a commodity.
Spread (calendar): holding a long position in one contract month and a short position in another month of the same commodity. Spread trades bet on the gap between months, not the outright price.
Stop order: an order that becomes active once the market trades at a set trigger price, often used to limit losses.
Tick: the smallest price move a futures contract can make, with a fixed dollar value per contract.
Troy ounce: the standard unit for precious metals, the precious-metals weight unit; it differs from the ordinary avoirdupois ounce.
Volume: the number of contracts traded in a session. Volume records activity. Check the order book and spread as well before assuming that an order can be filled at the displayed price.
Warehouse receipt: a document proving ownership of a stored commodity in an exchange-approved warehouse. It’s what actually changes hands when metal futures go to delivery.
Putting the terms together: reading a headline
Here is an invented headline for practice, not a current market quote: “Front-month WTI settled at $78.40, up 1.2%, as the curve flipped into backwardation and open interest climbed.” With this commodity trading glossary in hand it decodes cleanly. The front month is the nearest contract. The settlement price is the exchange’s official close. Backwardation means the nearest contract now costs more than later ones, which the market often reads as a sign of tight current supply. Rising open interest means more contracts remain outstanding on balance; it does not identify which participants opened or closed positions. One sentence, four terms, and now you know roughly what traders are thinking.
Common beginner mistakes this commodity trading glossary helps you avoid
- Confusing margin with the cost of the trade. Margin is a deposit against a much larger exposure. Your maximum loss is not limited to it.
- Ignoring the roll. A futures-based ETF can lose value in contango even if the spot price goes nowhere. If you own one, know its roll schedule.
- Using market orders in thin contracts. In a far-dated month with little volume, a market order can fill well away from the last price. A limit order controls the worst acceptable execution price, but may remain unfilled.
- Holding into first notice day. Check whether your broker permits delivery on your account, and brokers may close positions for you at an inconvenient price.
- Mixing up a troy ounce with a kitchen ounce. It’s a small difference per ounce, but on a 100-ounce contract it’s a meaningful amount of gold.
Where to go from the glossary
Knowing the words in a commodity trading glossary is the first step. For how they fit together in a real market, read our guide to crude oil trading basics or our gold investment guide. The CFTC’s own Futures Market Basics page is a good independent companion.
Frequently asked questions
What’s the most important term for beginners?
Leverage. It explains why futures can produce losses larger than your deposit and why risk management matters so much.
Is a troy ounce the same as a regular ounce?
No. A troy ounce and an avoirdupois ounce belong to different weight systems. Use the troy unit specified by the precious-metals contract or dealer quote.
What’s the difference between contango and backwardation?
In contango, later futures cost more than nearer ones. In backwardation, nearer futures cost more than later ones.
Do I need to know all of these before placing a trade?
No. From this commodity trading glossary you should at minimum understand contract size, tick value, margin, leverage, expiration and the difference between market and limit orders. Everything else can be learned as you follow the market.
Trading commodities involves risk. Past performance does not guarantee future results. This article is for education only and is not financial advice.
