Learn about commodities with some commonly asked questions on trading commodity CFDs. For further information, please refer to the contract details.
What are commodities?
Commodities are physical goods bought and sold through regulated exchanges. There are several types; the most popular ones include energies, metals, soft and agricultural. Commodities are traded in standardised contracts. One contract is defined as a certain weight or volume (or other agreed measurement) of that particular product. Commodity CFDs allow you to trade the changes in price of those contracts. You can either trade what it’s currently worth (the spot price) or its value at some set point in the future.
How are commodities traded?
Most commodities are traded on exchanges as standardised futures contracts. The value on which you are trading is that of a commodities contract at a set point in the future, taking into account the cost of holding/carry the physical assets until the expiry date. For example, the value of a July wheat future contract is based upon the current price of wheat and the cost of holding it until July.
What are the most popular commodities?
The most popular traded commodities are:
- several grades of crude oil (eg. UK Brent Crude and UK Light Crude) and its derivatives
- precious metals such as gold and silver and a range of base metals like aluminium and copper;
- agricultural goods, like pork bellies, live cattle, wheat, corn and sugar
IG Markets offers a wide range of commodities, including the commonly traded ones at competitive spreads with no commissions to pay. Using CFDs, you can speculate the future price of a commodity at a fraction of the cost of the underlying future contract. You can also trade the daily spot price as a CFD.
Who trades commodities and how?
There are two main types of commodity traders – hedgers and speculators.
Hedgers tend to be those who deal directly in the underlying commodities markets, and are looking to protect themselves against adverse price movements. For example, a wheat farmer may be a typical hedger. The price of wheat is often prone to dramatic changes based on demand and supply. A farmer may lose money from the time it takes to plant their crops to harvest time. The cash and futures price of a commodity tend to be linked. The farmer can hedge their trade by selling enough wheat futures contracts to cover the size of the crop. If the price of wheat was to drop, enough money can be made from the futures to offset the lower value of the physical goods. It therefore allows the farmer to effectively lock in a future value, which won't be affected by price fluctuations.
Speculators, by contrast, have no exposure to the underlying commodity market. They however take a view on how the value of goods may change over time. Commodity markets are characterised by price volatility based on supply and demand, which makes them attractive for speculators.
Often speculators use market research and technical analysis in attempt to predict future price movements. To assist with this, IG Markets offers a pro-level charting package to our clients, which includes a sophisticated pattern recognition charting software, Autochartist. Our research team also provides market updates throughout the day to help traders keep abreast of the latest financial news and events. They often provide updates on the price movements of popular commodities such as oil, base metals and gold.
How does commodity CFD trading work?
Most of our commodities markets are based on underlying futures contracts. We also offer daily spot trades on the popular Gold, Silver, US Light Crude and UK Brent Crude. Trading commodity works in a similar way to our other markets, in that we offer a buy/sell spread based on the price of the underlying market.
When you think the price of a commodity is likely to rise, you open a CFD trade by buying a contract at the higher price. To close the trade, you sell at the lower end of the spread. You do the opposite when you believe prices will fall, that is, open by selling a CFD contract at the lower price, and closing at the higher (buy) price.
The difference between your opening and closing prices, multiplied by the number of contracts you have traded is your profit/loss. Note when trading commodity CFDs, all trades are settled in cash, there is no option to physically deliver the good. You are trading on the change of contract prices and not on the underlying commodities themselves.
View our commodity examples to see how these can work in practise.
Why trade commodity CFDs with IG Markets?
There are a number of advantages to trading commodity CFDs with IG Markets.
- Access to a wide range of commodities markets, including some of the most popular energies, metals, soft and agriculture
- Competitive trading spreads with no commission to pay
- Access to third-party and in-house research, to help support your commodities CFD trading
- Real-time charting and Autochartist as part of a pro-comprehensive technical analysis package
Learn more about commodities and trading CFDs with our free online seminars.