What springs to mind when you hear the word â€˜commoditiesâ€™? Oil, gold, silver, wheat, gas and corn, are probably part of the picture. Commodities have been traded for centuries, and are possibly one of the oldest trading markets. Many, many hundreds of years ago, basic commodities were being traded all over the world. These basic commodities would likely have included wheat and gold. Today the commodity market includes agricultural products such as wheat and corn, energy products such as gas and oil, and base and precious metals such as silver and gold.
Trading commodities in the modern world
Traditionally, it would have been producers and consumers who traded in these markets. And these types of trader are still very much a part of the scene. Letâ€™s give you a modern day example to help explain. Imagine a well-known mining company such as Rio Tinto. As a producer, it is responsible for mining base metals out of the ground. The consumer will be a company who wants to use the mined metal but wants to be able to ensure a constant supply at a reasonable price. Rather than be worried about the ever-changing price of metal. As well as these participants there are also speculators and day traders who want to make a profit from the changing price of commodities.
Commodity trading is a risky investment
Commodity trading and CFD commodities are part of the futures market, and as you may already know this is an investment which has long-held associations with speculation and risk. You may not be aware it is also possible to use commodities as a hedging mechanism, and many modern day manufacturers use them to guarantee the price of any raw materials. For the ordinary man, it was historically not possible to trade in futures as large amounts of capital are required. Just to buy one commodities futures contract would require thousands of dollars. The only alternative would have been to buy company shares direct. Nowadays, the commodity market is a much more affordable place for the ordinary investor. And more recently commodity CFDs have become available as another alternative way of speculation.
What does a CFD commodity broker do?
A CFD broker is responsible for quoting prices on the popular global commodity markets, These prices include those for metals such as gold and silver, agricultural commodities such as cocoa, coffee, lumber, and wheat. And base metals such as copper. Most commodity CFDs are based on the futures market for their underlying value, but some may be based on spot or market pricing. This is what makes CFD commodities a little different than other CFDs, in that they will have an expiry date associated with each contract. As opposed to an expiry date which is based on the settlement date of the associated futures contract. Which leaves commodity brokers with two ways of dealing with a commodity CFD. An automatic rollover can be arranged, rolling it over to the next monthly contract, or to provide a cash settlement that effectively ends the contract, while also providing a contract to manually take up the next months contract.
What are the advantages of trading commodity CFDs?
There are a number of advantages linked with trading commodity CFDs when looked at in comparison with futures contracts. It depends on the commodity but usually with a futures contract there is a possibility you will have to accept delivery of the underlying product. With a commodity CFD, you are simply trading on the commodities price and will always be able to get a cash settlement. Trading commodity CFDs also offers the advantage of trading on margin. This effectively means you will be able to open much larger positions but only need to deposit a small percentage of the overall cost. You will, however, get to benefit from the full profit, but there is also the chance of suffering the full weight of a loss. As we all know, leverage, or trading on margin, is a double-edged sword. It is very likely, however, that the margin for trading CFDs is much lower than for futures, so you will have to pay less when trading a CFD commodity than you would trading on the futures market. There is another reason you will have to pay less. And it is the fact you do not have to take the standard trade size traded in the futures market. And this can make a significant difference for the average trader. While most CFDs mirror the futures market you will be trading in smaller amounts. Thereby making it much easier to manage your risks. Minimum lots sizes will vary from commodity broker to commodity broker but are always going to be less than those required for a futures contract. One further advantage of trading commodity CFDs, when compared with say buying a share, is you can do well whether the price goes up or down, depending on the type of trade you have opened. To profit from the price going down you would need to place a short or sell trade. You will, of course, have to pay interest if you open a long position and it is likely to be very similar to a futures contract. When you take a short position you will receive daily interest but this will be at a much lower rate than when holding a long position. There are very few commodity brokers who charge commission on commodity CFDs. They tend to make their profit via the spread. So you think you might be interested in commodity CFD trading? Letâ€™s look at one possibility receiving a recent upsurge of interest.
Best CFD Brokers
Trading silver has become a very popular investment choice
Gold and silver have always been a popular choice for those wishing to make an investment. It seems that the lack of confidence in the value of paper money is leading to investors look to precious metals as a way of making money. Owning these things puts them more in demand and thereby puts increasing upward pressure on the price. Silver has recently enjoyed an increase in attention, and a growing number of traders are learning how to trade silver using contracts for difference. Letâ€™s look at how itâ€™s done.
Silver has a number of interesting features that make it stand out from other precious metals There are a number of aspects that make silver a little different than gold. There is currently very little silver left of what has been mined, in comparison with gold where most of what has ever been mined is still in existence. Albeit in the form of jewelry and other items. Silver, on the other hand, gets used up for a variety of different things, not just for making jewelry. There are a number of different industrial processes which make use of silver such as industrial and photography. Industrial uses for silver are actually immense. There are, in fact, new uses found for silver on a regular basis. Silver is also no longer held as part of central bank reserves, in contrast with gold. In fact, more than three-quarters of silver which is mined today is used in industrial processes. Thereby reducing its overall supply. When chemical based photography ended with the introduction of digital images the price of silver plummeted and has only just started to recover. For the time being, it looks like nanotechnology may help the price of silver to recover further. How long the upsurge will last is purely a matter of speculation.
Trading silver CFDs is very efficient The amount you will need to put up to enter a trade is generally very low at present. You may find it as little as 0.5%. This results in leverage of 200:1. Compare that with the futures market, and you are only going to get leverage of 25:1. Therefore, trading CFDs is much more effective. You may find your commodity broker lets you trade on the spot price of silver, the currency market price. And you can also choose to take out a contract for a price at a specified time in the future. It is just as easy to profit from a fall in price as it is to profit from a rise. You can also make a profit during times when prices are consolidated. The only cost you have to worry about is in the spread. We should, however, remind you that leverage doesnâ€™t just work for you. It can work against you in equal measure. Resulting in a very painful lesson and possibly ending your trading career for good.
Looking for an interesting alternative? Why not consider trading oil with CFDs?
Oil is another commodity we feel very attached to. After all, the price of oil affects the price of fuel you put in your car. And the volatility of the oil markets make it perfect for those of you looking for lots of opportunities to make a profit. The price of oil is actually seen as an indicator of the health of the global economy. This is because there is a strong relationship between economic growth and the demand for oil. The price of oil is also affected by perceived shortages and also oversupply. Weather conditions can also impact on prices. Nevertheless, oil is still seen as a relatively safe investment. People will still need to use oil regardless of the state of the economy. The price of oil is constantly changing, is a very sensitive commodity and the market is truly global as well as being open 24 hours a day. Contracts for difference are the easiest way to trade on oil prices, and this may be why it is one of the most commonly traded markets. This is good news for you because it means youâ€™ll be able to get in and out whenever you want to regardless of the size of your trade. There are two main products available in crude oil CFDs. The US WTI/Light Crude which is traded on the New York Stock Exchange. And Brent crude which is traded on the Intercontinental Exchange. Both are priced from matching futures contracts and are available around the clock from Monday to Friday. It is also possible to trade heating oil on CFDs. Before we finish, letâ€™s take a look at how commodity trading began.
The history of commodity markets and trading
It is believed that commodity markets and commodity-based money originated in Sumer, between 4500 BC and 4000 BC. The Sumerians were the first to use clay tokens sealed in a clay vessel, and then clay writing tablets to represent the amount. This could be the number of goats to be delivered or the number of vessels of wine. The promised time and date of delivery were a form of futures contract. In its early history, commodity money could be pigs, rare seashells, or various other items. And ever since then traders have been looking for ways to simplify and standardize trade contracts. Gold and silver were originally valued for their beauty and intrinsic worth, but over time they became a popular method of payment for trading. The payment could be in exchange for other goods or commodities or as payment for a personâ€™s labor. Towards the end of the 10th-century commodity markets grew and were used as a means for allocating goods, land, labor, and capital across Europe. The increased use of coinage and the increased number of markets and fairs were evidence of commercialization. The Amsterdam Stock Exchange is often cited as the first stock exchange but actually began life as a market for the exchange of commodities. In the US, around 1864, pigs, cattle, corn, and wheat were widely traded using standard instruments on the Chicago Board of Trade. This is, in fact, the worldâ€™s oldest futures and options exchange. During the 1930s and 1940s, other products were added including rice, butter, eggs, soybeans, Irish potatoes, and mill feeds.