Spread Trading Commodities

Using Spread Trading to Trade Commodity-Related Markets

One of the most powerful features of spread bets is the ability to trade different investment products through one trading platform and one account. This feature is particularly useful for investors that like to trade commodities and commodity related equities and indices.

Commodities

The modern financial markets allow the buying and selling of more items than ever before; shares and bonds, the staples of the stock exchange for decades remain the largest portion of trade, but there is an ever-increasing market in commodities, to such an extent that some people think commodity trading may become as important as bonds or properties.

Commodities are things like oil, wheat, silver, copper, gold etc, they come in two categories: soft, which is generally foodstuffs, and hard, which is generally metals and oil.

The price of commodities is relatively difficult to predict, and perhaps this is why some people think there is a lot of money to be made in their trade. Poor crops can lead to a bumper price in wheat, for example, with the basic rules of supply and demand dictating the price of the commodity, but at the same time, when the price of raw materials go up, this encourages producers to increase production, and when they go down, the producers tend to cut back in order to force the price to rise.

Recently there has been a large variation in the price of gold, with the stock markets being so uncertain, people have looked to put their money into substances of more fixed value, this has led to the price of gold rising, although in recent days it has come back down. This is not just on the stock market, anecdotal evidence suggests that people are choosing to put their money into buying jewelry as they believe it is a secure asset.

The world’s major commodity, however, is not a precious metal like gold, but is in fact oil. Oil is one of the major factors in the world economy, when the price of oil goes up it sends shock waves around the global markets. It recently reached a new high, but then dropped by nearly $50 a barrel, before once again rising. Those in possession of the oil monitor the prices carefully in order to suit their own ends, but it has recently had large price swings suggesting the kind of volatility that some people can make a lot of money from.

Like just about anything else connected to the stock exchange, commodities can be bought and sold by those without masses of capital through spread betting. Spread betting is a leveraged form of trading which means that large amounts of money can be won, and accordingly lost, and the companies who operate spread betting markets, like Capital Spreads, are keen to make sure that those who gamble with them are aware of all the potential risks. One thing that is very important is to make sure that you know the market that you are playing, and a commodity is just as good a market to understand as any other. It is important, however, to know what you are doing, due to the risks of losing large sums of money very quickly.

One Trading Platform, One Account

Traditionally, investors wishing to trade commodities would need to open an account with a futures broker. Investors wishing to trade equities and indices would then need to not only open a separate account for their commodity-related equities, but a separate account for each currency that their investments are listed in, a Canadian Dollar account and a US Dollar account for example, and separate accounts for long and short positions.

With spread trading, however, investors have the ability to manage all of their commodity related positions through one account, making position tracking and risk management mush more efficient. Also, it is just as easy to initiate or close a long position as a short position, increasing investors’ flexibility.

Commodity Spreadbets

Investors can trade spreadbets on many different types of commodities including:

• Metals such as Gold Silver, Copper and others
• Energy such as Oil, Natural Gas, Gasoline, Heating Oil
• Agriculture such as Corn, Cattle, Hogs Oats, Soybeans, Wheat and others
• Fibres and Timber such as Cotton and Lumber
• Soft Commodities such as Coffee, Sugar, Cocoa and Orange Juice

Investors should note that not only are North American commodities available for spread trading, but also overseas listed commodities such as UK (Brent) Crude, providing additional trading options.

Advantages of Trading Commodities Through Spread Trading

Commodity spread bet pricing is based on the nearest month futures contract. When the underlying futures contract expires, the spread bet is automatically rolled over into the next near month. If there is a difference in price, however, the trader’s account would be credited or debited depending on whether that particular market is in backwardation or contango. So spread trading investors not only don’t have to worry about being forced to settle accounts on a certain date, they also don’t have to worry about the possibility of a commodity being delivered to their front door as spread trades always settle in cash.

While margin rates for Commodity spread trades are currently the same for an investor as trading the futures contract, one key advantage for traders that spread bets provide over futures is their increased flexibility in position sizing. The minimum size of a spread betting contract is one (barrel of oil, ounce of gold, etc.), unlike futures contracts. This flexibility enables new commodity traders to learn the markets, without having to put large amounts of capital at risk initially.

Commodities and Share Spread Bets

In addition to trading commodities directly, spread trades enable investors to participate in the price movements of shares that are sensitive to commodity price movements such as gold and energy producers. Through one account, investors can not only trade Share spread trades based on North American listed companies, but also on senior companies that are not listed on this side of the pond such as Xstrata PLC, owner of Falconbridge, Johnson Matthey, and Tullow Oil, which is partnered with some Canadian energy companies in Africa. In addition, spread trades enable traders in Canada to trade senior companies listed in London such as Rio Tinto and BHP Billiton as easily as a Canadian company.

Commodities and Index Spread Bets

Investors who want to participate in equity sector price trends but don’t want to take on specific company risks can also consider trading Index and Sector spread bets. For example, in Canada, one can also trade spreadbets based on the Gold sector, the energy sector and the broader Materials sector, while in the US, a Sector spread bet for the oil and gas industry is available.