Commodities are a popular market for spread bettors due in part to the high levels of volatility in many of these asset markets making it possible to earn big profits (and of course big losses) in short periods of time. Before you start to trading commodities you should check who has the tightest spreads and the lowest margins in our spread betting comparison table.
Here are some of the commodities that you can trade on:
Metals: Gold, Silver, Palladium, Platinum
Energy: Crude Oil, Natural Gas
Agricultural: Soybeans, Soybean oil, Soybean meal, Corn, Wheat, Oats
Meats: Pork Bellies, Lean Hogs, Cattle
Softs: Cocoa, Coffee, Sugar
Miscellaneous: Cotton, Orange Juice
It is important that you know what a tradable point is for each commodity as they will vary depending on the underlying asset. For example a tradable point on Gold and coffee is 0.1, however it is 0.25 for Soya Beans and 1 for heating oil.
A lot of the commodity markets are traded on a quarterly basis i.e. your bet will cover a quarter. The quarters in which they are traded depend on the asset – you can find out which quarter these are traded in through your spread betting company. Some of the more popular markets such as gold, silver and crude can be traded on a far more regular basis.
Reasons for spread betting on commodities include:
Volatility – The commodity markets are very volatile making it a very attractive market for spread betting as it means an investor can make huge profits (as well as losses). Volatility can be driven by any number of factors, for example, the price of oil can be impacted by one of or a number of the following:
These factors are just a few of the things that could affect the price of oil. If you are about to start spread betting on commodities you need to be aware of the factors that will impact the price of that asset. Research the commodity before you start spread betting!
Alternative methods of investing in commodities are hard to access - Individual investors cannot easily buy futures and options on commodities such as gold and silver as they may be prohibitively expensive or too large. Spread Betting allows you to take a much smaller position and it is as easy as logging in to your broker account.
Diversification – Commodities can help balance your investment portfolio as it gives you exposure to assets that may not be directly correlated to the markets. For example, gold is seen as a safe haven in a falling market.
You want to place a bet on the price of Crude Oil. Say, in this hypothetical scenario, the spread trading price of oil on January 3rd is $99.95 -$100.00 and you think the asset has been over-bought given the current state of the economy. You therefore decide to sell oil at £2 a point, a point being $0.01, i.e. you are going to make £2 for each $0.01 the closing crude oil price is below $100.00 and you are going to lose £2 for each $0.01 the closing price is above $99.95.
Let's also say you want to limit your risk and set a maximum potential loss at £200, so you set a stop at 200 points above the opening level at $101.95.
Opening price - $100.00
Closing price - $98.00
Difference - $2.00 or 200 points
Profit – 200 points * £2 = £400
Opening price - $99.95
Closing price - $101.95
Difference - $2.00 or 200 points
Loss – If a stop had not been placed your loss would have been £400 (£2 * 200 points), but as you placed a stop at you have limited your loss to £200