How does Spread Betting Commodities work?
Commodities* are mainly dealt with in future contracts. For example, the seller will agree to deliver 5,000 barrels of oil to the buyer in six months’ time at $60 a barrel. So the price of Brent Crude Oil Futures is said to be $60 per barrel. The price is nearly always based on futures rather than the current cash price, which is also known as the spot price. The futures price includes “the cost of carry”, which is basically the costs associated with holding onto the commodity for that period. So the value of a December Crude Oil future, includes the current (spot) price of the crude oil, and the cost of holding that oil until December. Spread bets on commodities are usually based on movements in that futures price. Although some companies do offer Spot bets on some oil and precious metals markets.
Who trades on Spread Betting Commodities and why?
There are two categories of traders in commodities – commercials and speculators.
These are commercial companies who enter the commodities market to hedge themselves against price movements in the commodities they buy or sell as part of their regular business. For example, airlines consume huge amounts of oil and if the price of a barrel of oil rises it can cost them a lot of money and reduce profits. Therefore, airlines tend to hedge a certain portion of their oil costs by betting on the price of oil rising in the futures market. Mining companies are also very active in hedging their output in the commodities markets by betting against the price of the commodity they produce.
These are investors and traders who have no natural exposure to the underlying commodity market. They trade commodities because they have taken a view that the price of a commodity is too cheap or too expensive, or simply because they want to diversify their portfolio from purely equity based to include commodities. Speculators will make their trading decisions based on many factors, such as the global economy, technical analysis, inflation expectations and relative mispricings between different commodities.
Tips on how to trade commodities
Before betting, make sure you know the market you are dealing with intimately. The more you know about a market the more confident you can be, and the more likely you are to discover profitable opportunities.
Some spread betting commodities trade on different exchanges in different countries. It is important to know what underlying contract the spread betting company is basing their price on. Is it UK-based or US-based, and in which currency is it? Note that in some markets eg Soybeans there will be a US and a UK price. Also what bet size limit is the company setting?
Political developments, economic trends and even the weather can affect commodities prices. For example, a strong global economy often sends energy prices up because industry uses more products when things are going well. Precious metals do well during times of uncertainty.
Many commodity markets have different trading times, so some markets may not have adjusted to the trading that happened before that market opens.
Use historical charting and as much technical analysis as you can to properly understand how your market works.
Be aware of key economic events, releases and announcements.
Commodity prices often tend to remain steady for long periods, and then swing suddenly.
Advantages of spread-betting over trading on commodities
Online share trading in the form of spread betting is one of the easiest ways to access the commodities market, requiring a much smaller initial outlay – smaller bet sizes and deposit requirements.
It removes currency risk because you trade in the currency you open your account with.
You don’t have to worry about the physical delivery of the actual product – which you would if you held the futures contract on the day it expired.
Energy resources like Brent Crude oil, Carbon emissions, US Crude, Natural Gas and many more. Big energy consumers, and big companies often use the energy market to hedge against rising of falling prices.
These are precious metals like Gold, Silver, Copper, Platinum, Palladium and many more.
Soft market commodities include Wheat, Sugar, Soyabeans, Cocoa, live cattle and much more.
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