The contract for difference (CFDs) trading has really revolutionized the financial markets. Nowadays, it is possible to trade almost any trading instrument (currencies, commodities, shares, and cryptocurrencies) using CFDs.
In this article, we are going to look at the commodity CFD trading market and what it entails. We will cover topics like:
- What is the commodity market?
- What commodities are traded?
- Commodity trading vs Forex trading
- How do you choose the best commodity CFD trading platform?
- Advantages and Disdvantages of commodity CFD trading
Commodity Market Trading
The commodity market can be termed as the oldest form of market in the world. It has been operation over thousands of years. It started as a mere exchange of the actual commodities. A trader would exchange some amount of gold for a given amount of wheat and so forth.
When we are talking of commodities, we are referring to agricultural commodities like cotton, energy commodities like oil and metals like gold and silver.
Then, the market evolved and went on to include futures contracts where manufacturers would secure the future price of their commodities. However, futures contracts are normally very expensive and traders will have to cash in large amounts of money to purchase a commodity contract.
Apart from futures contracts, traders and investors also started making profits by buying and selling shares of the manufacturing companies that were producing the commodities.
But nowadays, things are quite easy due to CFD trading.
In simple terms, commodity CFD Trading refers to trading commodities using contracts for difference (CFDs). This means, there is a contract entered into between a broker and a trader.
Through Commodity CFD trading traders or investors can make profits by trading the change in the prices of the commodities. This means that the trader/investor is not required to own any physical commodity like gold nor pay large amounts of money to secure a contract.
Through commodity CFD trading, traders can make profits even with as little as $1 dollar depending on the broker.
Common commodities traded as CFDs
Commodities are grouped into agricultural products, energy products, and precious metals.
1. Agricultural products
These include agricultural products like coffee, corn, wheat, sugar, cotton. Cocoa and soy. This normally forms the largest part of commodity CFD trading with coffee being the second largest commodity.
The prices of the agricultural commodities are highly controlled by supply and demand since they are things which are directly consumed by humans and animals.
There are also very many government regulatory bodies which also in a way play a role in the financial markets. For example, if a major producing coffee country imposes a tax on coffee, it will affect the cost of coffee.
2. Energy products
These are products that are used in the energy sector. They include but not limited to gasoline, heating oil, WTI crude oil, and Brent oil.
The prices of these commodities are also affected by supply and demand as well as well as other factors like sanctions.
Since these commodities are an integral part of the economies and industries, they are core to financial markets.
These normally include precious metals. Those metals which are normally sold and bought in large amounts due to some economic values. They include gold, palladium Silver, and platinum.
Although, in the early years one had to be stealthy rich to get involved in these metals, through CFD trading anyone can make profits from the prices of these metals.
Their prices are also controlled by supply and demand as is the case with all the other types of commodities in the financial markets.
Commodity CFD Trading vs. Forex CFD Trading
The two are similar in the way trades are executed. Actually, you will hardly find a broker that offers a commodities only platform. In most cases, brokers combine Forex and commodities.
However, Forex CFD trading involves trading the values of different currencies round the globe, while commodity CFD trading involves trading the value of different commodities or raw materials.
Also, the spreads in Forex trading are usually lower compared to commodity trading. Most commodities apart from the precious metals have very large spreads. As a result, not every trader can trade them since they require larger margins to open and maintain positions. For the precious metals, especially gold and silver, you will find that the spreads are quite low.
Best Commodity CFD Trading Platform
Since most commodity CFD trading platforms are provided by CFD forex brokers, you will be required to choose a broker who will, in turn, offer you the platform to trade the commodities using CFDs.
Therefore, you will have to decide on the type of broker you want; a Dealing Desk or a No Dealing Desk.
Then you will have to take the following factors into consideration when choosing the best Commodity CFD broker:
- The reputation of the broker when it comes to commodity trading. Here you can look for awards and publicity that the broker gets from the trading community.
- The history of the broker. When it was founded. It is always advisable to invest in a broker who has been in the market for a long time to void scams.
- The countries the broker is authorized to operate in so as to ascertain that your country is among them. It is always good to trade using a regulated broker.
- The products that the broker offers. The more the variety of commodities the better.
- The types and features of the trading accounts offered by the trader.
- The fees charged by the broker especially in terms of commissions.
- The available deposit and withdrawal options to find out whether they favor you.
- The user interface of the trading platform. Here you should at the ease of access to the platform and the tools that are at your disposal trading.
Advantages of Commodity CFD Trading
- When trading commodities through CFDs, there is no need of owning and storing the physical commodities that you wish to invest in.
- You can also invest with as little as $1. No huge amounts of money required to start trading.
- The commodity CFD trading brokers offer leverage to help you maximize your investment potential.
- You also have the opportunity to trade at any time of the day for 24 hours, 5 working days.
- With CFD trading, you can trade commodities from anywhere, including from your home.
- There is also access to a wide variety of commodities from a central point.
Disadvantages of Commodity CFD Trading
The main drawback of Commodity trading using CFDs is that it involves a very high risk especially due to the high spreads associated with trading commodities, especially using DD brokers.