Commodities are one of the longest-standing assets in the financial world and are actively traded throughout the world. Commodities are naturally occurring goods that are grown in the ground or are harvested. Since they are raw materials and are used to manufacture essential products like energy, clothing, and other goods, they are a vital part of a nation’s economy.
Commodities can be divided into two categories hard and soft. Hard commodities are materials that need to be extracted or mined, like gold and oil for example. Soft commodities are agricultural products, including materials like wheat and livestock, such as beef.
The commodities market can prove to be an attractive trading prospect since the fluctuations in prices can present opportunities to profit. Of course, since you are investing your own money in this volatile market, your capital is at risk, so it’s important that you have a developed understanding of the commodities market prior to investing.
You can also open a position and trade commodities with a contract for difference (CFD). On an online CFD trading platform, you can speculate on the price movements of some of the world’s most actively traded commodities.
In this article, we will explore the benefits of doing so and explain why you should consider trading in the commodity market through CFDs.
What is a CFD?
A CFD is a contract that is formulated between an investor and a CFD broker in order to open a position in the commodities market. This agreement requires both parties to consent to exchange the difference in the value of the investment from when the contract is first opened, to the point at which it is closed. By using this approach, you are trading on the value of the contract, rather than on the underlying asset itself.
You can use CFDs to invest in all commodities, but the most popular among traders is oil. If you’re considering opening a position in the oil market and haven’t invested before then you could learn more about how oil trading works on Plus500 for example, and start trading oil CFDs once you feel confident enough to invest.
Why choose CFD trading?
There are many benefits to trading commodity CFDs rather than investing directly in the asset. Some of the main advantages are:
1. Portfolio diversification is made easy
When trading in the financial market, you can reduce the risk of making losses on your capital by spreading it across different sectors, rather than concentrating it on one market. With CFD trading, you could easily invest in multiple assets and sectors. With one single account, you’ll be able to access not only commodities but currency, stock, and index.
2. A flexible trading approach
CFD trading not only enables you to trade in the market without owning the underlying asset, but you’ll also be able to open a position in commodities without having to submit the whole value of the asset. When you trade with a broker, you can pay just a portion of the whole value of the trade and borrow the remaining capital from them. This is known as leverage and means that you’ll be able to acquire greater exposure in the market without having to deposit so much of your own capital.
3. Trade on rising and falling markets
The value of commodities is subject to constant change because the market is so volatile. This change can be induced by lots of different factors, including political events, the health of national economies, and, in the case of agricultural commodities, the weather. This is because all of these factors can have an adverse effect on the supply and demand of a commodity, subsequently causing prices to rise or fall.
When you trade-in commodity CFDs, you can trade on both rising and falling markets, making strategic decisions that allow you to potentially profit from the situation. Many traders incorporate CFD trading in their strategy because it allows them to hedge their existing investments when periods of volatility and uncertainty arise.
By trading commodity CFDs, you could maximize the potential of your investments in the market by taking advantage of leverage and opening a larger position than you would have been able to afford with your capital alone. You’ll also be able to minimize the risk of your positions, by easily diversifying your portfolio. Plus, you can employ risk management tools when you invest in an online CFD trading platform.