Today, an online broker in the UK enables commodities trading with just a click of a button. It includes everything from gold, silver, and oil to natural gas and wheat. This guide explains everything required to know about commodity trading in the UK. It also provides how this particular online trading work, what risks and rewards are involved, and how to start with a commodity trading account, let’s dig deep into this article.
Different Ways Of Trading Commodities
Several ways can be used to trade commodities in the UK. Most traded commodities require physical ownership of the respective asset. Whereas, for some, you can perform it online. This way, you can effortlessly choose the most tradable instrument that meets your investing goals.
Some of the most common ways of trading commodities are given below:
Contracts-for-differences are the most effortless and cost-effective way of trading commodities in the UK. in short, they are the financial instruments that are created by online brokers to track the value of an asset in real-time.
Since the CFD instrument tracks the real-world price of the commodity, trading an asset becomes relatively easy. Here, you don’t have to take ownership of the commodity and store it physically. Instead, all you need to do is predict correctly the direction of the price of the commodity.
By taking the above point into consideration, you can use CFDs to virtual trade every asset class imaginable. Uncovering more details, it includes everything like gold, silver, oil, wheat, sugar, natural gas, and grain.
Moreover, it is ideal for trading commodities if you are thinking of starting with really small amounts.
If you are new to trading, you will not be aware of investing in commodities through an exchange-traded fund (ETF). it allows you to invest in several assets through a single trade. In the case of commodities, you can directly invest in the future value of assets like gold.
The ETF provider will personally buy and store gold bullion. Therefore, the value of your investment will fluctuate in line with the market value of gold. It is suitable for those who want to invest in a commodity for the long term. It is because the fees associated with it are usually sub or 0.5 percent per year.
Futures are other complex financial instruments that enable you to trade the future price of assets like gold or oil. Mostly, these commodity futures trading contracts are applicable for three months only. However, they also have some shorter or longer markets. Once it expires, you might have a legal obligation to buy and sell the respective commodity.
They are settled as an underlying commodity. That is why this form of trading is considered the best-reserved trading for large-scale financial institutions. It also allows you to offload your future contracts any time before the term of expiration. Furthermore, if you want to make money, you need to predict whether the futures will expire at a higher or lower value than the actual contract price.
Like futures, options are the most complex financial instruments to place sophisticated trades. It is highly beneficial as it enables you to access your selected commodity trading markets without investing the full amount upfront. It allows you to pay a small premium that acts as a non-refundable security deposit.
The only difference between options and futures is that options give you the right but not the legal remit to buy and sell the commodity. However, you can lose the premium. In terms of orders, it also works on calls and puts. It means that if you think that the price will rise, you should opt for calls. But, if the price falls, choose puts.
Sometimes, commodities are considered an inflation hedge. It means that they are outperforming the rising cost of living during periods of high inflation. However, with any investment, positive returns are not guaranteed. Since commodity price tends to fluctuate independently from the stock market, commodity price will not fall during a market downturn. However, they do not rise during periods of sturdy economic growth as well. Therefore, it is important to search about the investment appropriately before making decisions.