Here are the answers to some of our most commonly asked questions about trading commodities.
What are commodities?
Commodities are physical goods bought and sold through regulated commodity exchanges, such as gold, oil and soyabeans.
They are traded in standardised contracts, one contract being defined as a certain weight or volume (or other agreed measurement) of that product.
When spread betting on commodities you are betting on changes in price of those contracts, either currently in the markets or what they will be worth at some set point in the future.
Where are commodities traded?
Most commodities are traded on exchanges as standardised futures contracts.
This means 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 the physical assets until the expiry date (known as the 'cost of carry'), as well as forecasts of supply and demand.
So the value of a December crude oil future, for example, is based on the current price of crude oil and the cost of holding that oil until December. Other factors, such as market sentiment, supply and demand, and wider political and economic considerations will also influence prices.
What are the most popular commodities?
The most commonly traded commodities are:
- various grades of crude oil, as well as its derivatives (such as heating oil);
- metals, ranging from precious metals such as gold and silver to construction materials like aluminium and copper;
- agricultural goods, from live cattle and frozen pork bellies to wheat, corn and coffee
Oil and its derivatives are the most commonly traded commodities in the market, and we offer spreads on a variety of oil or oil-based commodities: Brent Crude (UK), US Light Crude, Heating Oil, London Gas Oil and No
We also offer bets on spot Gold and Silver, and daily futures on Brent Crude (UK) and US Light Crude.
Who trades commodities and why?
There are two main groups of commodities traders: hedgers and speculators.
Hedgers tend to trade directly in the underlying commodities markets, and are looking for protection should the price of their particular commodities move against them. For example, a wheat farmer would lose out if the price of wheat dropped. As the cash and futures price of a commodity tend to be linked, however, he can hedge his trade by selling enough wheat futures contracts to cover the size of his crop. When prices drop, he will make enough money from the futures to offset the lower value of his physical goods, therefore locking in a certain value of his crop which won't be affected by price movements.
Speculators, by contrast, have no exposure to the underlying commodity, but are taking a view on how the value of goods will change. Commodity markets are characterised by occasional dramatic changes in supply and demand, and the consequent volatility in prices create attractive prospects for speculation.
To increase their chances of success, speculators use a number of technical analysis methods, attempting to consider market data objectively and build models describing which way prices might turn. For example, chart analysis involves examining charts of market performance for trends, levels of support or resistance, common patterns or other indicators of future price movements. Our powerful Autochartist pattern-recognition software – available to all account holders – automatically detects, analyses and tracks the progress of a wide range of patterns and Fibonacci systems.
We also offer a weekly update on the latest UK commodity news, tracking the price movements of popular commodities such as oil and gold, considering the implications of recent economic events and offering commentary on the markets' short-term prospects. Take a look at our commodities update.
How does spread betting on commodities work?
Most our commodities markets are based on underlying futures contracts, although we do offer spot bets on Gold and Silver. Spread betting on commodities works in a similar way to our other markets, in that we offer a' buy' and 'sell' spread around the price of the underlying market.
When you think the price is likely to rise, you open your bet by 'buying' at the higher price; to close, you 'sell' at the lower end of the spread. When you believe prices will fall, therefore, you do the opposite – open at the lower ('sell') price, and close at the higher ('buy') price.
The difference between your opening and closing prices, multiplied by the amount per point which you have bet, is your profit/loss. Note that all spread bets are cash settled: as you are only betting on the changing price of contracts, not on the underlying commodities themselves, there is no option to settle on delivery of the physical commodity.
For a more detailed breakdown of spread betting commodities, take a look at our examples.
Why spread bet on commodities with us?
There are a number of advantages to trading on commodities with us:
- Bet on a large range of commodities markets – from popular energies like Brent and US crude oil, to metals like gold or silver, through to a number of softs including cocoa, coffee and wheat.
- Competitive dealing spreads including 4 points on Brent Crude and US Light Crude Oil, and 0.5 on Spot Gold.
- Access to a weekly commentary update from our in-house experts to help inform your spread betting
- Real-time charting as part of a detailed technical analysis package.
Learn more about spread betting with our free online seminars.
Spread bets are leveraged products. Spread betting may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.