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By: Rocco Gonzales

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Tuesday, 10-May-2011 05:38 Email | Share | | Bookmark
Advantages of CFDs in commodities trading

A smart way to trade in commodities is to do it with CFDs rather than futures contracts. In the case of future contracts and depending on the type of commodity you will have to undertake the possibility of taking a delivery of the underlying. In the case of CFDs, you are the actual owners of the gold, oil or any other commodity you may be dealing with. You are actually trading with the price of the chosen commodities and you will receive cash in return. There is never a chance of you having a huge shipment of the commodity being delivered to you at your doorstep.

An advantage with CFDs is that you will have the advantage of trading these commodities on margin. This means that only a small percent of the actual value of the commodity need go to the CFD broker, but you actually reap in all the profits. Compared to the futures market, the margin you put up is significantly lesser. The size of the minimal lot varies according to your broker, but no matter what, it will always be lesser than the underlying futures contract.

Another significant advantage when it comes to when you buy a share in say an oil company. You make a profit when the shares go up and you can make a smaller margin again if you put it on a short or a sell trade. This can only be done with CFDs and not in futures trading. Similar to futures, there is an interest charged on long term on your account. The rates too are pretty similar.

Short term positions give you daily interest but this is at a rate that is lower than what you would pay if you had been holding a longer term CFD. When you are working with a broker, they will charge you a commission on commodity CFDs. At other times they choose to make their profits through what’s available between the bid and the asking prices or basically in the selling and buying prices.

You have to understand that varying commodities come with different measurement scales and therefore the prices at which they are available constantly vary. Commodities are generally priced according to the single unit by which they are measured. When you are indulging in CFD trading with commodities it is better that you have some historical references based on which you do your trading. This will put you in better position in terms of making a profit.

IG Markets is aCFD trading company which offers share trading, forex trading on thousands of shares plus forex, indices, commodities, options and also commodity trading.

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