CFD Commodity Trading

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Tobias Robinson

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William Berg

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CFD commodity trading is a simple and accessible way for investors to speculate on the price movement of various commodities, from precious metals to energies. Traders do not own the underlying commodities when they invest in a CFD, which means that there is no need to worry about storing or selling commodities like coffee and gold.

This guide will explain how CFD commodity trading works with detailed examples, while also running through popular assets. Read on for tips on how to get started, as well as a list of the top brokers offering online CFD commodity trading in the UK.

Investing In Commodity CFDs Explained

CFD commodity trading allows investors to speculate on assets that they may not otherwise have access to, such as gold, silver, oil or natural gas. CFD stands for ‘Contract for Difference.’ It is a financial product that pays the difference between the opening price (at the time of purchase) and the closing price (at the time the contract is sold).

When purchasing CFDs, traders have the potential to go long and profit from a rise in the underlying commodities’ value, or go short and earn money if the value drops. As a derivative product, the investor does not own the underlying commodity. As such, they do not have to worry about taking on delivery and storing barrels of oil, for example.

Trade Example

The best way to understand CFD commodity trading is to look at an example. Imagine that an investor believes the price of UK Brent oil, which is currently trading at a sell/buy price of £85.99/86.00, is going to rise. They purchase 100 units, for which the broker offers a 5% margin rate, meaning the trader must put down a deposit margin of £430 (5% x (100 units x £86.00)).

It should be noted that this does not mean that losses are limited to £430, this is simply the amount of money that must be in the trader’s account to authorise the trade.

After a couple of hours have passed, UK Brent is now trading at a sell/buy price of £87.50/87.51. At this point, the trader decides to close their position. The gross profit is then calculated from the difference between the price when the CFD was purchased and the price when it was sold. In this case, there is a movement of £1.50 (£87.50 – £86.00). This is then multiplied by the number of units (100) to give a total gross profit of £150.00.

Most brokers offering CFD commodity trading will charge a commission on top of each trade. This is typically around 0.1% and applies to both buying and selling the contract. Therefore, in this case, the investor will pay £8.60 (100 units x 86.00 original buying price x 0.1%) and £8.75 (100 units x 87.50 selling price x 0.1%) in commission for each action, giving a total of £17.35. Therefore, the net profit for this CFD trade is £132.65.

Types Of Commodities

Traders can invest in CFDs relating to many different goods and resources. The most popular commodities for CFD trading can be split into three distinct categories:

Precious Metals

Metals have historically been the most popular commodity to trade. Investors can purchase CFDs relating to the value of gold, silver, platinum, aluminium, zinc, and copper, among others. Their popularity stems from their history as a store of value for some of the world’s best-known currencies. While most nations have moved away from the gold standard, metals continue to hold their value and provide exciting investment opportunities to traders, especially during periods of inflation and economic downturn.

The London Metal Exchange (LME) is well-known for providing trading access to a range of metals. Investors interested in gold CFD trading can also head to a broker such as XTB to get started.

You should always do your market research and follow a solid strategy when trading gold CFDs. Also, be sure to check the hours that trading is permitted by your chosen broker. The current price of gold in various countries can be found on TradingView.

Agriculture

Agricultural commodities are perfect for traders who are seeking to add a little more risk to their CFD trading portfolio. This asset group includes natural resources and foods such as coffee, orange juice, sugar, wheat, corn, and livestock.

These assets tend to be more volatile than metals. The price of an agricultural commodity can be affected by a host of external factors, including poor weather and natural disasters. They can present a good opportunity to turn a profit, however traders should ensure to implement risk management strategies to protect themselves against large losses.

Energy

Energy commodities cover a broad range of resources. These can include fossil fuels such as UK Brent Oil, petrol and natural gas, as well as renewable energy sources at green-focused exchanges.

Like their agricultural counterparts, energy commodities tend to be quite volatile. As seen with the Covid-19 pandemic and the crisis in Ukraine, oil and energy prices can fall and rise very quickly due to changes in supply and demand.

Spot VS Futures CFDs

Commodity CFD trading can be conducted in two ways: Spot and futures CFDs. Spot trading involves the contract being bought and sold at the current market price of the asset. The trade is opened and closed immediately or “on the spot”. This is the simplest form of commodity CFD trading for UK-based investors. Traders can monitor the live price of any commodity over a set period, and buy or sell at set entry and exit points.

On the other hand, futures CFD trading involves entering an agreement with a broker to purchase an asset such as rice or silver at a pre-specified price in the future. This allows traders to potentially benefit by locking in a better price than they would receive in the spot trading market.

Other than the price used, there are some differences between spot and futures markets at CFD brokers. Spot trading typically features lower spreads than futures trading. However, overnight charges will be incurred when positions are held longer in spot CFD markets. Futures markets do not tend to charge for swaps or rollovers.

The other difference is that spot CFDs do not typically expire, so they can be held for as long as the trader wants. On the other hand, futures commodity CFDs have a set expiry time and date.

Benefits Of CFD Commodities Trading

• Do not have to own and store hard or soft commodities, such as gold
• A small margin is required to purchase contracts
• Easy to implement risk management tools
• Traders can go long or short

Drawbacks Of CFD Commodities Trading

• While leverage can increase winnings, it also increases losses
• Spreads and commissions can negatively affect profits

Getting Started Trading Commodity CFDs

If you want to start CFD commodity trading, follow this step-by-step guide:

1. Choose a broker: The first and most important step is to choose an online broker that offers CFD commodity trading. Alongside ensuring they offer commodities, traders should also consider the various fees and commissions they will be charged to trade. This can include researching typical spreads, as well as overnight fees and any other charges that the broker may have. Next, those who wish to make use of leverage should look at the margin rates offered by different brokers. Finally, try to ensure your chosen broker has a good reputation and offers high levels of customer support, including 24/5 coverage if possible.
2. Select an asset: With a broker selected, you need to choose which assets you want to invest in, from metals like gold and silver to agricultural products such as coffee and rice. First-timers may want to opt for more stable commodities like gold, silver and platinum which tend to be less volatile. Those with more experience could turn to higher-risk commodities such as corn and oil which have prices that fluctuate more often.
3. Pick the direction of trade: Decide which way you think the price of the asset will move. If you believe it is going to rise in value, go long. If you think it will drop, go short and buy a selling CFD.
4. Choose the number of units: Select the number of units that you wish to purchase. When trading with leverage, more units will mean a larger deposit is required. It could also mean that your losses will be amplified, so always exercise caution.
5. Use risk management tools: These tools are the key to ensuring that you trade safely. Add a stop loss mechanism to make sure that you cannot lose a substantial amount. Also, consider implementing a take profit order to bank profits if the price of your chosen commodity rises suddenly.
6. Monitor and close: Once the trade is placed, sit and monitor. Check the live prices regularly and keep an eye on your account in case of a sudden change in value. Once you are satisfied with the growth of a CFD, close the trade and take your profit.

Bottom Line On Trading CFD Commodities

CFD commodity trading allows a much wider base of investors to get involved in an exciting and profitable market. Retail traders can speculate on price movements without owning underlying assets like rice and corn, and they can trade with leverage to potentially increase returns. The variety of commodity assets ensures there is something for everyone with a low-or high-risk appetite.

If you want to start CFD commodity trading today, check out our list of the best UK brokers.

FAQs

What Is A Commodity CFD?

A Contract for Difference (CFD) is a financial product in which the profit or loss is calculated from the difference between the price of an asset at purchase and the price at the time the contract is closed. They are derivative products in which the trader does not own the underlying commodity, such as gold, silver, oil or natural gas.

Which Are The Best Commodities To Trade CFDs With?

There is no simple answer as to which commodities are best for CFD trading. More cautious traders may prefer precious metals like gold and silver, whereas those with an appetite for risk may prefer oil and corn.

What Does It Mean To Go Long In CFD Commodity Trading?

If you go long, you are buying the contract. This is done when you believe the price of the asset, such as gold, will rise. The other option is to go short or sell the contract. In this case, you want the value of the commodity to drop.

Is CFD Commodity Trading Allowed In The UK?

Yes, CFD commodity trading is permitted in the UK. Many FCA-regulated brokers offer the derivative product to retail customers. Leverage is usually capped at 1:30 in line with regulations.

What Is Margin Trading In Commodity CFDs?

Many brokerages allow CFD commodity traders to borrow money from the broker, also known as leverage or margin. Essentially, the trading platform will offer a set rate of leverage (such as 1:30) for which the trader will put down a deposit of £1 for every £30 being traded. This can increase profits, but it can also lead to higher losses.