Commodities and Precious Metals CFDs

Commodity trading is commonly associated with futures, trading on the value of wheat or pork bellies for a certain month in the future. Originally a useful tool for hedging costs for the users and providers of these commodities, the futures market nowadays is used much more for speculative trading than for production purposes.

Trading CFDs for commodities and precious metals provides a new and convenient method of profiting from price changes in the basic elements of the markets. With the contract for difference, you are making a trade on the possible value of the item and never have a question of taking delivery or having to store any of the goods.

The great thing about using cfd trading for this activity is that you do not need to set up a separate account, as you may have to if you choose to deal in stocks and in futures, for instance. Your broker should be able to trade CFDs in whatever market you want to become involved with. The other advantage of CFDs is that you can go short as well as go long, and this is just as easily accomplished, which allows you to profit whether the market goes up or down.

Commodity CFDs are available for all the usual markets that you would trade on futures. This includes agricultural products such as corn, wheat, and livestock, and energy products such as oil and gas. Precious metals such as gold and silver can also be traded as contracts for difference, and because of the way the market is set up, you are able to trade in overseas markets just as simply as in the home market.

CFD pricing for commodities is based on the nearest month futures market, and the contract for difference may be automatically rolled over onto the next contract when each monthly contract expires. This means that there may be account adjustments, up or down, around the expiration date. As with all contracts for difference, commodities CFDs are marked to market, and you should expect that the value of your account will vary each day.

The fact that these contracts can automatically roll over should reassure you that you will not suddenly receive a delivery of, say, pork bellies, as in theory you could if you trade futures and neglected to take action on expiration. CFDs are always settled by payment, rather than with the underlying goods. Instead of automatically rolling the contract over, some brokers will instead provide cash settlement each month, along with an offer to manually roll over the contract to the next month’s futures.

Given that you could use futures contracts to trading commodities, why would you choose to use CFDs? The margin rate, that is the money that you pay for the leverage that you enjoy, is similar between CFDs and futures, so the interest payments would not make a significant difference. You may find that the margin requirements for CFD trading are less than for futures, as they are typically around 5%, which would mean you need to put up less money for the quantity you want to trade.

However, if you are a smaller trader and do not wish to be involved with the quantities specified in futures contracts you will find that the CFD is a boon. Commodities CFDs are usually traded with a size of “one”, the units depending on the commodity being traded. For instance, a CFD for oil would be based on one barrel, while a CFD for gold would specify 1 ounce. Having said that, some brokers will require that you trade a minimum size, for example you may have to trade 25 barrels of oil, but you will still find the quantities are far less than required in futures contracts.

The other limitation with futures contracts is that they are settled on a certain day of the month, and there is no flexibility in that. With contracts for difference, although they may be affected by the futures settlements you have no compulsion to close your trade at any particular time.

As with many CFDs, there is no commission charged for trading, but the broker’s profit is built into the pricing. There is a spread or margin between the buy and sell prices, which allows the broker to make money for providing the service. In other ways, the commodities CFDs operate similarly to those on other financial securities. You will be charged interest for each day that you hold the CFD trade, if you’re in a long position, or you will receive interest if you take the short position. You should look for a trading platform that allows transparent pricing in order to ensure that you are not paying more than the market rate for the CFD.

Of course, you should be aware that there are downsides to trading CFDs on commodities and precious metals, and these arise in similar ways and for similar reasons to the disadvantages and risks in futures trading. With a leveraged financial product, your gains are multiplied, but so are your potential losses.

If you misread the market, and have a losing trade, then the leverage that you enjoyed for multiplying your profits will work against you, and can cause you to lose more than your account. This may result in the broker issuing you a margin call to submit more funds, and can even mean that you must find more money than in your original account.

There are risks in all trading activity, and if you wish to have the advantages of gearing or leveraging your money then you must accept responsibility for your choices. Such risks are inherent in all trading, and CFDs provide you with a convenient and affordable method to make a profit from commodity and precious metal price changes.