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Commodities are widely traded through CFDs as an alternative to the logistical problems and costs involved with straightforward commodities acquisition. A class covering a wide range of different tradable products, commodities markets include those for gold, silver, coffee, wheat, steel and a range of other generic raw materials. Capitalising on the natural demand for these goods, traders can take advantage of fluctuations in price whilst avoiding the need to fund often costly purchases in full, creating just the right blend of profit potential to risk.

Commodities are defined as any tangible, generic product for which there exists a market of supply and demand. These tend to be non-perishable raw materials which are freely exchanged by both price speculators and end users, creating a ready and transparent market for the relevant goods. Buying commodities is often used as a strategy amongst larger investment funds as a guard against inflation and economic instability, given that raw material values rise with inflation and bear little direct resemblance to economic goings on.

For this reason, amongst others, the market for gold has been particularly strong during the recent banking crisis, with trading institutions seeking to move away from volatile stocks into more stable, virtually immune gold reserves. Likewise, in periods of rising inflation trading portfolios can actually see growth where others might falter, leaving commodities exposure to act as a form of hedge against wider economic movements.

The main advantage of trading commodities with CFDs is the lower cost barrier to entry.

The margined nature of trading contracts for difference makes it possible to take both long and short positions with just a fractional margin requirement. In other words, this means traders can take on a deeper exposure to a commodities position than may otherwise have been the case, oftentimes requiring as little as 5% to cover the margin requirement.

A Short Example of Trading Wheat

A weak harvest couple with growing interest from food manufacturers in Asia has led you to believe the demand for wheat will rise over time.

Option A: Buy Wheat. You invest $1,000 of your trading capital in wheat, realising a return of 5% over time and a resulting trading profit of $50.

Option B: Buy a Wheat CFD. You invest $1,000 of your trading capital in a contract for difference for wheat, with a margin requirement of 10%. This translates into a position worth $10,000. You realise the same 5% return over time, but generate a resulting trading profit of $500.

In the above example, the trader has improved his portfolio by 50% off the back of a movement of 5% in commodity prices. This leverage afforded by trading in CFDs makes it possible for the trader to earn more with a lesser exposure, and with no need to stump up the extra cash to fund the $10,000 position. Of course, the leverage provided by the broker will attract interest, and a larger trading commission than on Option A, but this can be offset from the greater proportion of profit generated from the same astute position.

Trading equities with contracts for difference is perhaps the clearest example of a trading situation where CFDs have an obvious upper hand. That upper hand comes both in the form of leverage, which enables the trader to gain proportionately more from the same position for the same level of deposit, and in the form of a more favourable tax treatment, which can save a considerable amount on the costs of banking a profit. But how exactly do CFDs interrelate with equities, and how does the process of CFD equities trading work?

Equities are essentially stocks and corporate instruments that relate to particular companies. Most commonly, tradable equities are listed on the FTSE100 or its sister exchanges, and are open for public trading throughout the trading day. These tend to take the form of ordinary shares, although it is not uncommon for publicly traded companies to offer preference shares and debentures on the same exchanges.

The core advantage of trading equities through CFDs, as mentioned above, is the ability to leverage your positions.

Equities trading tends to take place on a pound-for-pound basis, meaning any gains in the underlying price of the asset are reflected in the profits obtained by the trader. Essentially, this means a 5% increase in stock price will result in a 5% increase in the value of your trading portfolio.

Trading the exact same positions with CFDs can ramp up these earnings by many multiples, without the need to spend any more heavily on the position. This means you’re staking less, pound-for-pound, to reap the rewards of more, and provided markets continue to move in your favour the advantages of this inbuilt leverage can be significant gains over a shorter period of time.

But margined trading also has another ancillary benefit, freeing up capital that would otherwise be tied up in an equities position to open other trading positions. Rather than having to invest $10,000 to secure a $10,000 valued position, a trader might only need to pay $500, leaving the remaining $9,500 free for further investment. This means traders can effectively maximise the efficiency of their trading capital, earning more money per pound invested than what would otherwise be the case.

Further Benefits of Trading Shares Through CFDs

Furthermore, when trading equities through CFDs, traders are not liable for stamp duty in the UK, which is in fact charged on shares dispositions where applicable. Particularly for larger trades, this can amount to a significant saving, leaving the trader with a higher proportion of profit from each successful trade.

Perhaps the central point of trading equities through CFDs is the ability to benefit from price speculation without the responsibilities of share ownership. The format of CFDs means traders can benefit from dividend declaration and other corporate actions without the need to actually invest in the underlying company, circumventing the issues with share ownership while giving the trader the pecuniary advantages of being invested.

Trading equities through CFDs is a popular alternative to straightforward stock investing, and provides a myriad of advantages. Of course, the risks associated with such leveraged trading are an ever-present reality, and at no point should be ignored, but the potential gains to be had and the more favourable regulatory treatment of CFDs makes them a popular trading format amongst private investors.

Forex, the market for global currency trading, is the most intensely traded market on the planet, with literally trillions of dollars tied up in the various global currencies. While forex trading is a subject in its own right, with countless volumes dedicated to strategy, analysis and the nuances of trading currency, it is also widely traded through contracts for difference, which can be used to take a view of the wider performance of a currency pairing in response to market indicators and macroeconomic events. But what exactly is forex, and how does trading forex with CFDs make a difference?

‘Forex’ is a contraction of ‘foreign exchange’, and pertains to the trade in foreign currencies which many investors treat as the mainstay of their trading endeavours. Currencies are traded in pairs, and are expressed in the form Currency 1/Currency 2 (e.g. USD/JPY), which creates a ratio from which the currency value is derived. Forex is already a highly leveraged form of trading, but with contracts for difference, leverage can often run as high as 500:1, providing traders with excellent opportunities for profit maximisation.

Of course, one of the most attractive factors about trading currencies is their volatility, and their responsiveness to macroeconomic factors. When interest rates move, currency trends are reasonably predictable, and there is usually a logical and readable interaction between current economic affairs and currency prices.

Because of the exposure of investment institutions and governments to foreign currencies, the vast majority of whom hold substantial reserves and respond in a conservative way to preserve their resources, currency trends can often be reasonably foreseeable (assuming your perspective is shared by the markets). Unfortunately, this can also cause problems in relation to the early closing of otherwise profitable positions – currency prices can tumble very quickly off the back of major institutions offloading their holdings, and when combined with a high degree of leverage, critical damage can be done in just a few short minutes.

Trading Forex Through CFDs

Trading forex through CFDs provides the advantage of amplified leverage, but also plays a crucial role in locking in profits that might otherwise be vulnerable to currency fluctuations. When a trader closes a profitable USD position, the profit obtained is locked in as part of a USD balance – the profit still has to be converted in GBP before it can be spent.

If this conversion takes place even a few seconds after closing a profitable trade, there is no guarantee that currency prices will be as favourable as at the moment you closed. Similarly, a loss may be worsened in the interim period between closing out and reverting to your domestic currency.

With CFDs however, there is no actual currency acquisition taking place – it is the CFD itself which is traded. The CFD pricing mimics currency pricing, although profitable positions when closed are automatically in the currency you’re used to using, removing this additional layer of currency conversion (and the associated conversion expenses) while eliminating the risk of variations in price.

For this reason, in addition to the positive effects of increasing leverage through trading on CFD margins, trading forex through CFDs can be an advantageous alternative to pure forex trading, and one that is proving increasingly popular amongst experienced and new traders alike.