Difference Between CFDs vs Commodities

Commodities trading is a huge sector of the investment industry, with everyone from private individuals right up to institutional investors getting involved in commodities as a means of capitalizing on supply and demand.

In addition to trading commodities in the physical sense, there are also a raft of other ways in which commodities can be traded indirectly, which provide a work-around for some of the less desirable side effects of trading commodities. With CFDs in particular, the benefits afforded to investors can be significant, and can have a massive impact on your bottom line.

Commodities trading

A commodity is a fundamental good that is traded in large quantities and can be exchanged with similar products of the same kind. Commodities are broadly sorted into four categories: metal, energy, livestock and meat, and agricultural products. Commodities can be traded for immediate delivery in the spot market or for future delivery through futures contracts. Commodity markets cover a range of items, including metals like aluminum, copper, gold, and silver, as well as "soft" commodities such as cocoa, coffee, sugar, and oil.

For investors, commodities provide a valuable opportunity to diversify their portfolios beyond conventional securities. Since commodity prices often move inversely to stocks, many investors turn to them as a source of returns during times of market volatility.

Commodities trading with CFDs

CFDs (Contracts for Difference) are a type of derivative that allows traders to speculate on commodity price movements without actually owning the underlying asset.

With CFDs, traders can profit from changes in a commodity's price by entering a contract with a broker, which has a predetermined end date. If a trader anticipates a price increase, they will buy the CFD; if they expect a decrease, they will open a sell or "short" position. When the contract ends, the difference between the commodity's price at the start of the contract and its price at the end is exchanged between the trader and the broker.

In simple terms, when trading commodities CFDs, the trader profits or loses based on the difference between the opening and closing price of the commodity. What makes CFDs appealing is the ability to "go short," meaning traders can potentially profit when the price of a commodity declines. This flexibility to profit in both rising and falling markets is particularly valuable during periods of volatility.

CFDs are often simpler than other instruments like options and futures, as they offer easier entry and exit from positions. This simplicity, along with other advantages, has contributed to the growing popularity of trading commodity CFDs.

CFDs and commodities: Five key differences

There are, however, multiple differences between CFDs and commodities.

1. Price
One of the most important ones is that commodities have a set date for completion which will, ultimately, come with a set price. On one hand, this means that trading in commodities can be more transparent than CFDs. On the other hand, this means that CFDs can be more flexible.

2. Leverage
The use of leverage, or borrowing money in order to get more access, or exposure, to a market is commonplace with CFDs, but it less common, although still possible, with commodities. Note that leverage can magnify both profits and losses.

3. Physical assets
Buyers who keep their position in a future contract beyond the due date should be ready for a physical delivery of an underlying asset if it exists in physical form, while CFDs are purely hypothetical. For example, traders comparing oil CFDs vs commodities in the commodity should keep that in mind.

4. Contract sizes
CFDs always trade per contract, while commodities’ contract sizes vary. When deciding on an instrument, stock traders, for example, can choose between single stock commodities vs CFDs on stocks.

5. Flexibility
CFDs can be more flexible and can operate on a short-term basis, while commodities can be more of a longer-term investment.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.