We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Level up your trading with our powerful tools and real-time insights all in one place.
A commodity is a basic good which is interchangeable with other goods of the same type, and is traded in large volumes. They can be traded for immediate delivery, in spot trading, or can be traded as futures.
Commodity markets deal in four broad categories:
As well as actually buying and selling quantities of a commodity, there are ways to take trade them using other financial instruments.
Futures Contracts
A futures contract is an agreement to buy or sell a particular commodity at a specified price, at a set time in the future. The agreement is legally binding – the buyer is obliged to buy and receive the underlying commodity when the expiry date is reached, and the seller is obliged to deliver the underlying commodity when the contract expires. For example, an airline can use futures contracts when purchasing fuel to lock in the prices for a certain period, protecting against unpredictable swings in prices.
Speculative investors use futures contracts to profit from changes in the price of the commodity, and often close out the contract before the expiry date. They never actually take delivery of the commodity itself.
Futures contacts can lead to significant profits because they allow for high leverage, where investors take a strong position in the market with a relatively small amount of capital. However, this also increases the risk of considerable losses.
Options
An option contract is a lower-risk way of entering the futures markets. With an option, you have the right to buy the commodity at the specified price when the contract expires, but you are not obliged to follow through – so if the price has moved against you, you limit your loss to just the initial deposit made on the option.
Leverage trading is the use of a small amount of capital to gain exposure to larger trading positions. In effect, the trader is borrowing money to conduct a trade, which will be paid back from the profits when the trade is closed.
Traders want to make a profit on the difference between the open and closing prices of a trade. The larger the position taken, the greater the profit will be. Using leverage amplifies the amount of money the trader is putting down to trade with, so allows them to take out a larger position.
The amount that the trader puts down as a deposit for a trade is called the margin. The leverage ratio is the amount that the margin is multiplied by to provide funds for the trade. For example, if the margin is £200 and the leverage ratio is 10:1, the funds available will be £2,000.
The higher the leverage ratio, the greater the profits from a trade – but if the trade goes the wrong way, the greater the loss.
Brokers will offer various leverage ratios. Financial regulations mean that the ratios are capped at a maximum level.
| Leverage ratio | 1:1 (no leverage) | 20:1 | 50:1 | 100:1 | 200:1 |
| Margin | £1,000 | £1,000 | £1,000 | £1,000 | £1,000 |
| Exposure | £1,000 | £20,000 | £50,000 | £100,000 | £200,000 |
1. How do I use leverage to trade commodities?
Leverage can be used to increase your exposure to a commodity by allowing you to open larger positions than the actual capital you deposit. The amount of funds available to put into a trade will be your deposit, multiplied by the leverage ratio. The extra funds are temporarily covered by the broker and then paid back from the profits when the trade closes.
2. Is trading with leverage risky?
Yes, trading using leverage carries a high level of risk. If the market moves against your position you may have to pay substantial extra funds – a margin call – to maintain the position. If the trade closes at a loss you will not only lose the initial funds you deposited, but any resulting deficit in your trading account.
3. How does leverage affect the size of a trade?
The higher the leverage ratio, the more funds you have available to use when taking a position. This means that with higher leverage you can buy more units, or lots, of the commodity you wish to trade, while depositing less margin.
Trade a variety of popular commodity CFDs with leverage. Gold, Oil and Silver are all available on our leading trading platform.
Commodities CFDs are available with up to 1:20 leverage. You can start trading with as little as £100 to gain the effect of £2,000 capital!
Ready to begin your commodity trading journey? Click here to check out the Plus500 platform! *80% of retail CFD accounts lose money.
The information provided in this article is for informational purposes only and should not be construed as financial, investment, or professional advice. The views expressed are those of the author and do not necessarily reflect the opinions or recommendations of any organizations or individuals mentioned. Always consult with a qualified financial advisor or other professionals before making any financial decisions. The author and publisher are not responsible for any actions taken based on the content provided.
.png){kind=logo}
Support: 1-888-992-3836 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
Hot Features
Premium
