What is commodities trading?
In trading terms, a commodity is defined as a good that is interchangeable with other produce of the same type. Commodities trading is therefore the way in which such goods are bought and sold around the world. Many investors have turned to CFD trading on commodities, as this allows them to profit from rising or falling prices. As CFD trading is a form of margin trading, a much smaller initial stake will be required than if you were to purchase the underlying commodity, but you are still exposed to the full movement.
All about commodities trading
The most popular commodities markets can be grouped into four broad categories - precious metals, agriculture, energy and softs. The energy and metals markets are relatively self-explanatory, while agriculture covers crops like wheat. Meanwhile, softs refers to goods such as coffee, sugar and cocoa.
Gold, silver and crude oil are among the most popular commodities for CFD trading.
Numerous factors can have an impact on commodity prices, but one of the most influential is simple supply and demand dynamics. Production is another thing that can drive prices up or down, while seasonal changes will have an effect on the value of crops. Storage capacity, particularly for energy commodities, is a further element that can influence the prices at which such products are offered on the market.
Commodity CFD examples
When you open a CFD you can choose to either go “long” or “short” depending on whether you expect the price of the instrument to rise or fall.
A 'LONG' TRADE - YOU EXPECT THE PRICE TO RISE
US Oil is trading at 10530 - 10534.
You think that the demand for US crude oil is increasing and in turn the price will rise, so you decide to place an order to buy 20 CFDs at 10534. This means that for every point the price of US Oil moves, you will enter a profit or loss of $20.
Your prediction was right and the price of US Oil rises to 10720 – 10724. You close your position at 10720. The difference between your buy price 10534 and your sell price of 10720 is 186 points, therefore you make a profit of $3720 (186 x your 20 CFDs stake).
Your prediction was wrong and the price of US Oil falls to 10390 – 10394. You close your position at 10390. The difference between your buy price 10534 and your sell price of 10390 is 144 points, therefore you make a loss of $2880 (144 x your 20 CFDs stake).
A 'SHORT' TRADE - YOU EXPECT THE PRICE TO FALL
The Silver Contract is trading 1285 - 1286
You think that the demand for precious metals is declining and the price of silver will fall, so you decide to place a trade selling 10 CFDs at 1285. This means that for every point the price of the Silver moves, you enter a profit or loss of $10.
Your prediction was right and the price of the Silver falls to 1200-1202. You close your position at 1202. The difference between your sell price 1285 and your buy price of 1202 is 83 points, therefore, you make a profit of $830 (83 x your 10 CFDs stake).
Your prediction was wrong and the price of Silver rises to 1350-1352. You close your position at 1352. The difference between your sell price of 1285 and your buy price of 1352 is 67 points, therefore, you make a loss of $670 (67 x your 10 CFDs stake).
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