Spread Betting Tips and Information on Commodities

1. Spread betting on commodities is one of the easiest ways to access the commodities market. Commodities are very much sensitive to the state of the global economy which makes for a volatile situation which many spread betters love.


2. While most users of spread betting who trade commodities tend to focus on gold and oil, it can be worth following other commodity markets as well. Some of the more common commodities that you can trade with most spread betting providers are Cocoa, Coffee, Corn, Lean Hogs, Live Cattle, Oats, Soybean, Soybean Meal, Soybean Oil, Wheat and Sugar. Note that there is a quote for Soybean (US) and one for Soya bean (UK).


3. In the physical market, commodities are often traded in lots or contracts, which can take some getting used to. Buying one lot of oil contracts is effectively $10 a point. But some investors may not want to do $10/£5 a point on such a volatile market. With spread betting this problem is eliminated, for instance if you wanted to bet £3.35/point, that would be perfectly acceptable – you do not have to deal in multiples of the minimum bet size.


4. Spread betting allows you to start with both a lower initial deposit requirement and lower minimum trade sizes; for instance bets on aluminium start at just £1 a point. Most commodities are usually traded in Dollars (although of course you can always spreadbet in the currency that suits you), one of the notable exceptions being Cocoa (London) which is traded in Sterling.


5. Other obvious advantages include not having to worry about physical delivery of the actual assets (would you really want a truckload of coffee?) and the ease of settings up stop losses/limit orders.


6. Spread betting on commodities also removes the currency risk exposure as you spread trade in the currency you chose when opening your account.
7. When spread betting it is crucial that you have access to some historical charts to see just how volatile it is before risking any money: like with other financial markets, some commodities can be very volatile and move through wider price bands than others – if starting out with a limited balance you need to stay away from markets which are very volatile like lumber or strictly limit your bet size to a minimum.




8. You can bet on commodities as a hedge against the possibility of further inflation as the economy gradually recovers (and say, the effects of quantitative easing start being felt in the economy). Commodities such as oil increase in price as inflation goes up – you can even hedge the price of petrol by taking a spread bet; this involves some maths to determine the bet size but may be well worth the effort. Thus if you go long on oil and the price keeps going up this will inevitably lead to an increase in the price of petrol but the extra cost would be offset by the gains from your spread bet. On the contrary if the price of oil goes down, so will the price of petrol.


9. Commodity traders do need to be aware of key economic release/events with analysis and forecasts on how it is likely to affect the commodity markets. Often, information on soft commodities in particular is not talked about until it is too late. For example, crop reports, weather forecasts and inventory data are all hugely significant influences, whether you are a long-term trader or an intraday trader.


10. Of course, the wider the spread and the more unusual the trade, the more risk the trader takes. For this reason providers may impose restrictions on the markets available to certain clients, for instance clients who have ordinary accounts with City Index will have access to more than 20 different commodities but clients with limited-risk accounts will find that they are limited to 3 commodities (gold, silver and oil). Also, there is a limit on to how much you can bet using a limited risk account – this is checked at £25 a point unlike a normal account where you can bet up to £500 a point on gold. Controlled risk accounts also come with wider spreads than ordinary accounts and you would need to set a minimum stop loss of 100 for gold, 20 for silver and 100 for Brent Crude. With a standard account you would need to manage your own risks using stop losses.


11. Guaranteed stop loss orders albeit expensive and not widely available in these markets can be especially useful when spread betting commodities as they can be subject to wild swings overnight and a commodity market will hardly ever open where it closed in the previous session. This is especially true with soft commodity markets which have shorter trading hours than currency markets or indices and can open at different price levels from the close of the night before.


12. Beware that trading soft commodities is primarily a professionals markets. Many ‘soft’ commodity markets are dominated by food producers to such an extent that poor timing and random events can produce big losses for the unwary.


13. Providers make their money by adding to the market spread on commodities and financing costs on long bets.
    

Spread betting can be an effective way of investing in commodities IF YOU KNOW WHAT YOU’RE DOING. Most don’t and most lose. Don’t do it unless you know what you’re doing.

Differences between Shares Trading and Commodities Spread Betting

1. Commodities are driven by supply and demand whereas shares are driven by greed.


2. Unlike stocks commodities will always have some value, a company can go bankrupt but commodities do not and hedging by either the farmers or the government will always limit the downside. For instance the price of orange juice can never go to zero, because there will always be demand.


3. Also, unlike equities, individual commodities trade in very small time slots, sometimes as short as five minutes, spread out over the day, and the lack of a continuous stream of liquidity makes for high volatility.


4. Also, prices for some commodities can continue going up or down for several weeks followed by dramatic price adjustments – averaging down can be very dangerous when betting on commodities.


5. Apart from spread betting you can also gain exposure to commodities by investing in commodity company shares or exchange-traded funds (ETFs). Exchange traded funds follow the market price – unlike investments in commodity company shares and are not subject to stamp duty.

>> Spread Betting on Commodities (continued)

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