Trading commodities with CFDs

There are a number of ways to trade commodities.

One of the easiest ways, however, is through Contracts For Difference (CFDs).

What is CFDs?

CFDs are financial instruments that offer traders and investors the opportunity to profit from the price movements of a security without actually owning the underlying security.

Advantages

Trading commodities through CFDs has a number of advantages:

CFD positions that stay open overnight incur a small fee, relative to the value of the position. This is essentially an interest payment to cover the cost of the leverage that you use overnight.

• CFDs enable you to profit from price movements of a commodity without having to take delivery or arrange supply of the commodity itself (i.e. a barrel of oil or a bar of gold bullion).
• CFDs enable you to use leverage to increase your exposure to a commodity.
• There are typically no transaction fees associated with CFD trades. The main form of fee that traders pay is the ‘spread’ between the buy price and the sell price of the trade*.

How does it work?

Here’s how trading commodities with CFDs works:

1. You choose the commodity you wish to trade. For example, oil.

2. You set up the CFD trade by selecting:

• Buy or Sell.

You’d select buy if you believe the commodity’s price is going to rise. This is called ‘going long’.

You’d select sell if you believe the commodity’s price is going to fall. This is called ‘going short’.

• The amount of money or number of units you wish to trade.
• The leverage involved.
• Your stop loss or take profit orders.

3. You open the position.

The position remains open until you either close it or it is closed by a stop loss or take profit order, or the expiration of the contract.

CFD positions that stay open overnight incur a small fee, relative to the value of the position. This is essentially an interest payment to cover the cost of the leverage that you use overnight.

Reprinted from eToro, the copyright all reserved by the original author.