CFD trading and commodities trading are both popular in the industry. Commodities take on a huge part of the investment industry as companies, from private individuals to huge institutions taking up to this industry to capitalize on the products that are on-demand by every country. Additionally, there are also a lot of ways to trade commodities which include being traded indirectly, which provides a desirable workaround for those not so desirable side-effects of commodities trading.
It is important to note that trading commodities physically is very tiresome and time-consuming compared if you are going to deal with commodities with CFD. Trading CFDs in commodities and trading it physically offer the same styles however, physical commodities have barriers that can be a hindrance to small-time traders.
Problems of Physical Commodities Trading
For instance, one of the burdens of commodities and dealing with it physically is handling. Whether it’s wheat, livestock, oil, or coffee, each one of these commodities is very expensive to handle. The trouble of buying, storing, and shipment is unthinkable. If you are a trader in commodities wanting to buy 100 barrels of oil, you might rethink these issues and indicate additional costs for these items to be properly handled and distributed. But for small investors, this can be a barrier especially the added costs that they will have to shoulder.
But if you trade commodities on CFD, these issues are taken care of. This is an easy way out of this dilemma. The physical purchase is already tough and the handling and distributing is making everything worse. In a CFD transaction, you don’t have to handle the commodity itself. Rather, there is a contract between the trader and the broker that sets the value of the underlying commodity. CFDs are a sure way and the easiest one in dealing with commodities trading, without the need to take on the extra burden.
More importantly, the costs of a CFD position are much lower than buying actual commodities. This is because the contract has a price based on a certain level bearing the relation of the underlying asset.
Another important detail about trading commodities with CFDs and physically dealing them on your own is that commodities on CFD allows leverage transaction. CFD has a margin nature and because of this, the trader does not need to take on huge capital to start trading in the market. You can get good exposure just by paying a small amount of money. This is ideal for traders who cannot afford to pay upfront the amount needed to trade on physical commodities.
With a 5% margin, a trader can take a transaction with 20 times its original size. This movement of size is very appealing compared to when a trader holds on to a physical commodity. Just for this very reason, some traders who can actually afford to handle the expense of handling physical commodities turn to CFD trading to take advantage of this benefit powered by leverage in CFD.
No matter how great CFD is, you should never forget to employ your risk management strategy to avoid incurring more losses than gains.