Stocks and shares are not always the most exciting investment opportunity and reading up on a company’s financial affairs can be enough to send the most hardened insomniac into the land of nod. However, for those who want to take advantage of the potential that spread betting offers, it is possible to dabble in a different market, namely commodities.
What exactly is a Commodity?
‘Commodities’ is the term used to describe any goods where the end result is the same, regardless of where it is purchased. For example, an ounce of pure gold has identical qualities whether it is bought from either the UK or India. Commodities include goods such as oil and precious metals but also cover consumables such as wheat and cocoa. Some of the most frequently traded markets in the world of commodities are consumable products. But the term, ‘commodity’ does not apply equally to all consumable products; they must be interchangeable to be included in the market. For example, raw cocoa is a commodity but a chocolate bar would not be because the end product would vary depending what other ingredients were included.
Is it the same as spread betting on the stock market?
Just like other forms of spread betting, commodities have a wide range of factors that can influence their price, but many of these are different to that seen in other aspects of investing. For example, any trader wanting to spread bet on the price of wheat would have to become an expert in the problems that wheat producers face. Bad weather and disease as well as seasonal variations all affect the price of the crop and a potential spread better has to learn about all of these elements to stand any chance of making a profit. Some markets are more easily learned than others. Some, especially those involving spread betting on the price of livestock (yes, really) are much more complex and are best left to those with some prior knowledge of the industry.
Whilst the commodity market is far from straightforward it is possible to trade without being an expert in farming, agriculture or mining, providing you are willing to put in plenty of hours of research to understand the market. Spread betting on commodities offers traders the chance to profit from the moving prices and the volatility without ever having to face the prospect of taking responsibility for a shipment of goods they never wanted.
Spread betting on commodities works in the same way as other markets. It works on the following basis; the number of points difference in the end price compared to the starting price multiplied by the amount per point gives the total loss or gain.
Give me an Example
To demonstrate this, let’s pretend you want to spread bet on sugar, an incredibly volatile market with plenty of potential for profit (and losses). London Sugar is looking like a good deal, with a spread of just 1 and the broker is offering 593-594. You are certain that the price of sugar is going to climb, so you go long at £10 per point. As time passes the price inevitably climbs and you opt to lock in your profits once it reaches 620-621. You earn a very nice £260 (opening long price of 594 – closing price of 620 = 26 points x £10 per point = £260). If, on the other hand, the threat of diabetes sent global demand for the white stuff lower and the price tumbled to 580-581 you would be facing a loss of £140 (starting price of 594 – closing price of 580 = 14 points multiplied by £10 = £140).
Commodities offer traders an interesting diversion from stocks and shares and with the volatility in the market, provide plenty of potential to earn a profit. However, even though the concept is the same, the variants affecting the market are very diverse so switching requires plenty of time and effort to understand how the commodity trades before starting to spread bet.