Traditionally commodity markets started because they were where raw or primary products could be exchanged. Due to the size of commodity markets globally they vast became very popular for traders along with people in those particular industries. For this reason commodities are now amongst some of the world’s most popular products to be traded. Commodities are predominantly traded on global futures exchanges but now some CFD providers offer the same privileges but there is a lot you need to know. A good example of very popular trading commodities are Crude Oil, Silver and Gold.
How Commodity CFDs work
Very similar to buying a equity CFD or Index if you believe the value of a commodity will increase you buy the CFD and if you believe it will decrease you short sell the CFD. Depending on the broker depends on whether you pay brokerage and commission or not. Market Maker providers will widen the spread very similar to that of and Index or FX CFD. A DMA CFD provider will have underlying futures market price feeds which are much tighter but will charge a ticket fee. On the other hand a lot of Market Maker CFD providers will charge financing whereas DMA providers will not as they are not charged financing by holding the hedge in the underlying Futures Market.
Commodity CFD markets run similar hours to that of Index and FX CFDs. This means they will trade nearly 24 hours a day, with small breaks between equity markets opening and closing times, and then close for weekends. They are extremely liquid and can be quite volatile which presents plenty of trading opportunities.
Futures markets offer what’s called deliverables. This means once the futures contract expires the trader may have to either take delivery of or deliver the set quantity of the actual raw commodity they were trading in. In the case of CFDs, as far as I am aware, this does not exist so you have nothing to worry about. As far as commodity CFDs goes they are all financially settled. This means on expiry you will settle the difference in the opening and closing price of the contact rather than having to deliver 1000 barrels of crude oil let’s say.
This will vary greatly depending on your provider. A market maker will offer a large ranges of sizes. As an example a standard futures contract size (where commodity prices are derived) is 1000 barrels of Crude Oil or 500 Barrels for a mini. This means if the price of oil, let’s say WTI spot, is trading at US$80 per barrel then you gross exposure will be US$80,000 (1000 x 80) for a full size contract or a mini would be US$40,000 exposure (500 x 80). Therefore each dollar the value of crude goes up in a full size contract the trader makes US$1,000 and for every dollar it goes down loses US$1,000. In the case of gold it will be a weight denomination like 100 ounces for a full contract.
DMA providers as they do not make a market will offer those same specifications as above. Market makers will sometimes off much small contracts with much wider spreads. They are able to do this as they do not necessarily hedge. I traded with a provider who offered a contract that was 25 barrels for WTI spot crude. It really depends who you trade with.
As we just touched on depending on the type of commodity CFD you trade will depend on whether not they expire. Market makers sometimes offer a continuous spot price without having to roll contracts over. DMA providers will only offer it as it stands in the underlying markets which means your contracts will generally expire quarterly.
Another brilliant benefit of commodity CFDs is they are generally offered with a lower margin than the underlying exchange. The company I trade with offers margins from 3% where the underlying futures markets require more than 10% in some cases.